How to sell put options to benefit in any market
Put Options Explained: Buying & Selling Put Options
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hey guys and welcome back to mike and
his whiteboard my name is mike this is
my whiteboard and today we're going way
back to the very beginning of options
we're going to talk about the put option
so a put option is essentially the right
to sell 100 shares of stock at a certain
strike price so this differs and it's
similar to just selling stock outright
but we're gonna break it down a little
bit here so as you can see by the
graphic when we buy a put option it
becomes more and more profitable as the
stock price goes down and again that's
because when you're buying a put option
it gives you the right to sell 100
shares of stock at that strike price so
as you can see here if i buy a put at
110 and the stock price is at 100 if the
stock price goes down to 90 and 80 and
70 i still have that right to sell my
shares at 110 which is going to mean
that that put contract is going to be
more and more profitable
so when we compare selling stock
outright to buying a put when we short
stock we have unlimited profitability
to zero because the stock cannot go past
zero so it's important to keep that in
mind and we also have unlimited time
just like buying stock when you're
selling stock you can hold that stock
for as long as that stock is publicly
traded so if you have the ability to
hold that with the amount of cash in
your account then you have unlimited
time and therefore you have unlimited
time to be correct
however with a put option we still have
unlimited profitability to zero
but we have limited time just like a
call option when we're purchasing a put
option we have a certain expiration date
and by that date the stock is the put
option's either going to turn into short
stock or it's going to be worthless if
it's out of the money so let's break
down and put option a little bit further
in the next slide here
so when we're buying puts it's important
to know that we i have a bearish
assumption so bearish assumption again
is the assumption of wanting the stock
to go down in price so when we're buying
puts and selling calls as we might have
seen in the previous whiteboard we want
that stock to go down because it's going
to give us the ability to be profitable
also when we're buying put options we
have negative theta so just like buying
call options the option is going to
decay more and more as expiration years
and that is known as theta decay so when
we're buying options we have negative
theta decay but when we're selling
options we have positive theta decay
because when we're selling options the
theta decay is good for us and when
we're buying options the theta decay is
bad for us so it's shown as a negative
value
when we're buying put options we also
have unlimited profitability as long as
the stop stock goes to zero because the
stock cannot go past zero
and it's very similar to shorting stock
in that sense so when we buy options we
have unlimited profit and when we sell
options we have limited profit
also when we're buying options we have
limited loss and that's because we can't
lose more than the debit we paid for
that option
so if everything goes against us let's
say the stock price goes to 120 or 130
that put option is going to be
considered out of the money and at
expiration it would expire worthless but
we can't lose more than the debit we
paid as long as we're purchasing options
and because of that we have a low
probability of profit as you can see on
our diagram to the right when a stock
price goes up we're not going to be
profitable in that put position because
we want the stock price to go down
and also if the stock price stays right
around 100 as you see in this diagram
here we're still not going to be
profitable because we need the stock
price to go down as you can see for us
to be profitable when buying a put so
when we're buying a put we can only be
profitable in one out of three ways and
that's when the stock price goes down
but let's go to the next slide and we'll
talk about what can happen if we're
selling a put
so as you can see in the diagram here
it's very similar to selling a call it's
just flipped on its axis so when we're
selling a put our max profit is capped
and the max profit is realized if the
stock price is above our short strike at
expiration so as you can see here we've
got a 90 short put that we may have sold
and if the stock price is at 100 even if
it goes down to 95 94 93 as long as it
stays above 90 at expiration we'll be
able to reap our full profitability
so unlike buying a put option selling a
put option we have a bullish assumption
so again a bullish assumption is when we
want the stock price to go up so buying
or selling a put is very similar to
buying a call in that regard
like we stated earlier when we're
selling puts or selling options in
general we have positive theta and
that's because if we sell an option here
and the option decays and decays and
decays over time if we can buy it back
for a lower amount the difference in
that prop that difference in those
prices is going to be our profitability
so that's why when we're selling options
you'll see a positive theta value there
additionally when selling options we
have limited profit and that's because
the most we can possibly make on the
trade is the credit that we received in
the first place
so if we sell a put regardless of where
it is as long as it stays above our
short strike at expiration we'll be able
to keep that profit and you can see that
by the horizontal line above the stock
price there
conversely when we're talking about
selling puts we have unlimited loss when
the stock goes to zero but it's capped
as long as the stock goes to zero
because as we stated before
a stock price cannot go below zero but
we don't really know what our loss can
be because if the stock price goes below
90 so if it goes to 85 or 80 or 75
we can of course calculate what that
loss would be at expiration but we'll
never really know it's not defined until
we get to that expiration value
and for that reason we have a high
probability of a profit when we're
looking at short options specifically
short puts so because we have that
limited profit and tying that together
with the unlimited loss we have a higher
probability of success which can we can
see on the profit chart to the right so
if the
stock price is above our short put at
expiration and the stock goes up we'll
be able to keep our credit that we
originally received as you can see here
additionally just like a short call if
the stock price doesn't really move at
all we can still be profitable at
expiration because all we really need to
do is make sure that that strike price
and the option that we sold the strike
price at stays out of the money so if
the stock price hovers right around 100
as you see here we would be fully
profitable at expiration
if the stock price goes down however
past our breakeven point that's when we
would start to see a loss on the trade
and because of that as you can see we've
got two out of three ways to be
profitable when selling a put so let's
get to takeaways here and we'll wrap it
all together
so a put option gives us the right to
sell shares at a premium so
very on the opposite side of calls we're
looking at buying a put so when we're
looking at buying a put we have the
right to sell 100 shares of stock at a
certain strike price so
basically if the stock price goes down
and i buy a put option it's going to
become more and more profitable over
time which is what allows me to sell the
shares at a premium
so with that said buying a put is a
bearish strategy so when we buy a put we
want the stock price to go down
inversely when we're selling a put we
want the stock price to go up which is
why selling a put is a bullish strategy
and lastly longer dated puts will have
higher premium value just like with call
options so anytime we have an expiration
date the more days until that expiration
date that we have to be correct we're
going to have to pay a higher premium
for when we're buying options and if
we're selling options with the longer
days till expiration we're going to
receive a higher credit for that
so thanks for tuning in this has been a
put option hopefully you enjoyed it if
you've got any questions shoot
at doe.com or support
or you can shoot
raider mike and until next time have a
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