Hello friends, The harsh reality of today generation is that they want fast money and stock market is one of the best place for that but in reality making money in the stock market is really difficult especially for the beginners. But today I will tell you a powerful strategy that will be highly beneficial you everyone, from beginner to advanced investors.
With this, you can generate a consistent income and moreover you may get the opportunity to buy high-quality stock at the discounted price. And the name of this strategy is Selling Puts. and trust me if you learn this then may be your investing journey will change completely.
💰What is a Put Option? A Simple Definition
A put option is generally just like a insurance contract on stock. Not only this, There are two parties: The one buyer of the put option and other one the seller of the put option. Whenever you sell the put option, then you are making a type of promise to buy the stock if it drop below the certain price and in exchange for this promise, you will get a upfront premium and this premium is your profit. This strategy is so fantastic that most probably everyone can do it. Selling option is just like selling an insurance. Whenever there is a lot of volatility in the market then the people will scare and it’s a good thing because due to the high risk, insurance premium also increases.
Think Like an Insurance Seller 💡
Have you ever thought that why Warren Buffett had given so much money to insurance company like Geico? This is because insurance business print money. And in case you didn’t know, Warren Buffett also secretly sell put option and His own company Berkshire Hathaway also do the same. When you sell a put option then you just become a small insurance company. Just like a car insurance company which charge you initially, you also collect the premium. If any accident occur like stock price drop, you have to buy back the stock but in most of the cases there is no accident and you will get your entire premium back. In this you have realized that you collect a lot of premium and pays out a very little, so overall you are always in profit.
How to Sell Puts? (Step-by-Step) 👣
This is very simple. Only three steps, that’s it:
- Choose a High-Quality Stock: First of all, just find a company which you like and wants to invest in for the long-term like Apple, Microsoft, Nvidia, or any good company. The biggest rule of this strategy is only sell the put on those stock which you really want to buy.
- Pick a Strike Price: Choose a price below the current market price. For example, if the apple stock is $210 then you can sell a put option for $190. This means you are promising to buy that stock if it reaches $190.
- Collect the Premium: As soon as you sell the put option, the money is immediately credit to your account and this premium is your income.
🚀Two Possible Outcomes: More Benefit ✅
Let’s understand with the Apple stock: The Current Price is $210 and You Sell a Put Option: at $190 (Strike Price) and Premium Collected is Let’s say $600 (for 100 shares)
Now two possibilities is there:
- Outcome 1 (most Common): Stock remain above the $190.
- Whether the stock goes upside, sideways or even slightly down, as long as it above the $190, it will expire worthless.
- You won’t have to buy any stock and you will also get the full $600 premium. This is a very common outcome and it generates your income.
- Outcome 2 (when you get the chance): Stock drop below $190.
- Assumes that the stock drop to $180 and you have promised to buy at $190, then you will get the 100 shares at $190.
- Here you will see some small losses, but wait! you also collected $600 premium. so your real cost is $190 – $6 (premium per share) = $184 per share.
- so that means you got the Netflix stock at a discount and on the top of that you also got the premium!
The Golden Nugget: It’s All About The Math 📊
Why this strategy is so genius? It’s because math is in your favor. So many put options always expire worthless, especially when you choose the short-term strike price. Over a long period of time, stock market always goes up. So therefore if you sell put on the high-quality stocks, then the chances of loss is quite less. You’ll only incur loss only if there is a stock market crash or your stock didn’t recover. But if you have chosen a good company, then it recover in the long-term.
The Real Risk to Selling Puts ⚠️
With selling put, there is a draw down risk (i.e loss in a market crash) is lower than the normal stock investor. If you fear of market crash, then the selling put option is safer for you because in this you have a margin of safety and a cushion. But that’s not the real risk for selling puts, the real risk is opportunity cost.
When the market upside very quickly, quickly just like a bull run, you don’t get as much big profit. You only get the premium which you collected initially. For example, If stock of Apple went from $210 to $250, the stock investor made a profit of $40 but you only made a profit of $6 per share (premium). you miss out on those big gains but for consistency, this is a quite stable strategy.
Practical Guidelines & Greeks 🧪
Expiry: The most favorite time frame is generally from 30 to 45 days. This allows you to earn good premium and avoid having to manage position repeatedly.
Delta: This is a Greek letter that indicates what is the chances your option has of expiring in the money
- Safe: Delta 20 or below. You will get the lower premium but risk is also low.
- Sweet Spot: 30 delta. A good mixture of good premium and safe zone.
- Aggressive: Delta 40 and above. Higher Premium, but the risk also increases.
Theta (Time Decay): When you sell the option, then the time decay is your friend. Each and every day, the value of option decreases, and this happens especially in last 30 days. so therefore you have a greatest advantage with the time.
Conclusion: Final Verdict of Selling Puts 🤝
In the current scenario, selling puts is quite a powerful and safe strategy. You just need to know how to use it correctly. It allows you to buy the high-quality stocks at the discounted price and also to generate the consistent cash flow by collecting a premium. In this, the risk management is very important, and the most trusted advice is to invest 5-20% of your total capital in a single trade.
So, if you are a beginner, then this is a perfect strategy for you. Get started, learn a little and then gradually make it a pert of your investing journey. Remember this, Selling put is very versatile and stable strategy that can help you to make money in the long-term. So Happy Investing!