One way to generate additional income for your business is by selling put options. While there are some risks, and it requires more active participation, you can make some good money if done right. A put option gives you the right to sell a specific number of shares, of a stock, at a set price by a specified date. You’re basically betting against a stock or the market. The seller receives a good rate for agreeing to buy the shares if the owner decides to execute the put. This is a good form of insurance against a declining stock price. If the put is secured by cash, it can be less risky than owning the stock. Continue reading to learn some of the benefits.
Hedge your positions
Some critics say that the draw-downs of selling puts can be significant in the event of a major market downturn. Yet, you can avoid any draw-downs by simply hedging each position or your full put-sale portfolio. Of course, there is always a risk in any type of trading. That is why you should consistently hedge your portfolio with contemporary portfolio protection techniques.
What is a naked put?
A naked put is what a put is called when the investor does not own the shares against which the put has been sold. The maximum risk is the strike price the investor has sold minus the premium made by selling the naked put. When you sell naked puts, you should think about whether you want to own the stock at the strike level. In addition, you can buy back the naked put to remove your obligation to purchase the shares of the stock.
Use a margin account
With a margin account, you are able to sell puts without needing extra funding in the account. As a result, you can stay completely invested in the stock market in order to receive long-term stock market gains. Then, if you sell any puts–this is essentially icing on the cake called your investment portfolio. Yet, if the put option is executed, you can purchase them on margin with borrowed money–this is called leverage.
A similar example would be using a credit card. If you don’t want to lose out on any long-term market gains, then you can use leverage to sell put options. If the volatility is high, you can receive higher premiums or a better income. If volatility is low, you can find sections of high volatility in the market.
Consider the odds
Why would anyone want to sell puts? Well, you might not want to purchase a stock at the current price or market levels. You should also make sure that you do not anticipate a major price correction in the stock. When a price correction occurs, this can be a good buying opportunity.
If you implement an effective put writing strategy, you can outperform the market over time. Plus, you can always hedge during draw-downs. Moreover, you can use statistical analysis such as probability and expected return to ensure a winning plan.
Trading has its ups and downs. Yet, a well-researched put strategy can put you ahead of the market.