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When selling puts with no intention of buying the stock, you want the puts you sell to expire worthless. This strategy has a low profit potential if the stock remains above strike A at expiration, but substantial potential risk if the stock goes down.
The reason some traders run this strategy is that there is a high probability for success when selling very out-of-the-money puts. If the market moves against you, then you must have a stop-loss plan in place. Keep a watchful eye on this strategy as it unfolds. You may wish to consider ensuring that strike A is around one standard deviation out-of-the-money at initiation.
That will increase your probability of success. However, the lower the strike price, the lower the premium received from this strategy. Some investors may wish to run this strategy using index options rather than options on individual stocks.
Selling puts as pure speculation, with no intention of buying the stock, is suited only to the most advanced option traders. It is not a strategy for the faint of heart. As long as the stock price is at or above strike A at expiration, you make your maximum profit. Potential loss is substantial, but limited to the strike price minus the premium received if the stock goes to zero.
The premium received from establishing the short put may be applied to the initial margin requirement. After this position is established, an ongoing maintenance margin requirement may apply. That means depending on how the underlying performs, an increase or decrease in the required margin is possible.
Keep in mind this requirement is subject to change and is on a per-contract basis. For this strategy, time decay is your friend. You want the price of the option you sold to approach zero. That means if you choose to close your position prior to expiration, it will be less expensive to buy it back. After the strategy is established, you want implied volatility to decrease. That will decrease the price of the option you sold, so if you choose to close your position prior to expiration it will be less expensive to do so.
Options involve risk and are not suitable for all investors. For more information, please review the Characteristics and Risks of Standardized Options brochure before you begin trading options. Options investors may lose the entire amount of their investment in a relatively short period of time. Multiple leg options strategies involve additional risks , and may result in complex tax treatments. Please consult a tax professional prior to implementing these strategies. Implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or the probability of reaching a specific price point.
The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract. There is no guarantee that the forecasts of implied volatility or the Greeks will be correct. Ally Invest provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice. System response and access times may vary due to market conditions, system performance, and other factors.
Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, are not guaranteed for accuracy or completeness, do not reflect actual investment results and are not guarantees of future results.
All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. The Options Playbook Featuring 40 options strategies for bulls, bears, rookies, all-stars and everyone in between. The Strategy Selling the put obligates you to buy stock at strike price A if the option is assigned.
Options Guy's Tips You may wish to consider ensuring that strike A is around one standard deviation out-of-the-money at initiation. Break-even at Expiration Strike A minus the premium received for the put. Maximum Potential Profit Potential profit is limited to the premium received for selling the put. Maximum Potential Loss Potential loss is substantial, but limited to the strike price minus the premium received if the stock goes to zero. Ally Invest Margin Requirement Margin requirement is the greater of the following: As Time Goes By For this strategy, time decay is your friend.
Implied Volatility After the strategy is established, you want implied volatility to decrease. Use the Probability Calculator to verify that the put you sell is about one standard deviation out-of-the-money. Use the Technical Analysis Tool to look for bullish indicators.