Invest in Stocks by Trading Sell to Open Put Options

The strike price represents the price at which the option buyer can force you to buy the stock from him. Because of the put options you sold, you have a $40,000 total potential commitment to your put option buyer, minus $11,600 in cash received from him, equaling $28,400 remaining potential capital you’d need to come up with to cover the stock purchase price if the options are exercised. Since originally, you were to spend $29,100 buying 1,000 shares of Tiffany & Co. stock anyway, you’re fine with this outcome. Put options give the option buyer the right to “put” the stock to the option seller for a predetermined price, typically a higher price than the current market price, good up until a predetermined date.

As an options trader, you can take advantage of this down-market volatility to help investors curtail their losses while also earning a potential profit for yourself. One of many options trading strategies, selling open put options could, if executed under the right market conditions, generate high profit.

If the stock is trading below $270 at expiration, your (now in the money) option will be assigned and you will purchase the stock for $270. Because you collected $12.50 in premium on the option sale, your basis price is $257.50, an almost 5% discount to the $271 you were going to pay. The reason this trade can work so well is that when a stock goes down, the implied volatility of the options – especially puts – usually goes up.

Words related to sold

Speaking of risk, this strategy is not recommended for any but the most seasoned investors. Sellers just learning how to sell options can become intoxicated by the large cash receipts deposited into their account from “insurance premium” payments, not realizing the total amount they need to deposit in the event all of the put options they sold were exercised.

SYNONYMS FOR sell

This protects investors by letting them get out of their stock position before it loses too much value. For example, as of the close of markets on October 14, 2008, shares of Tiffany & Co. were selling at $29.09 each, down from a high of $57.32 prior to the crash on Wall Street. Investors were panicked that the retail environment was going to fall apart and that high-end jewelry was going to be one of the first things to go because consumers weren’t going to buy expensive watches, diamond rings, and housewares when they couldn’t even pay their mortgage.

Netflix (NFLX) is down nearly 30% off its 2019 highs on changing outlooks about the streaming industry and the prospect of increased competition coming soon from Disney (DIS) and Apple (AAPL). You think the market reaction is overdone and want to become an investor at the current stock price of $271. Instead of simply buying the stock, you sell the 270 strike put expiring on December 20th at the current bid of $12.50. Your net price on the purchase will be the strike price minus the premium you collected on the sale.

Barring that outcome, if the buyer exercises his options, you get the stock at a reduced cost basis, and you’ll also keep the interest earned while you had the money invested in Treasury Bills. In this scenario, the company’s stock stays strong, the buyer never exercises his options and the expiration date comes and goes. You keep the money the buyer paid you for the “insurance premium” forever, and essentially, in exchange for putting $28,400 aside in Treasury bills for a year, you were paid $11,600 in cash. That’s quite a nice return on your capital for the one-year duration of the put option contracts.

With a large enough trading account, you as a trader might have a substantial enough margin cushion to buy the shares anyway, but that could evaporate in the event of another round of widespread market panic. For the strategy to work, you must sell it at a higher price, and then buy the stock at a later time, at a lower price from your broker and keep the profit, assuming the market goes down. Many investors feel uneasy when the stock market starts heading down, and if the trend continues, they start to feel outright panic. Suddenly, people want to sell off their shares quickly to avoid any further drops in stock prices and the resulting hit to their portfolio’s value.

Each put option contract represents “insurance” for 100 stock shares, so 20 contracts cover a total of 2,000 shares of Tiffany & Co. stock. Thus, if you wanted to buy 1,000 shares of Tiffany’s stock, you would take $29,090 of your own money plus $10 for a commission, and use the $29,100 to buy the stock at the October 14, 2008, market price of $29.09 used for our example. Let’s say that at some point in the past, you had wanted to purchase Tiffany & Co. shares because they have great brand recognition, and they operate using a fairly simple business model.

sold meaning

Definition for sold (2 of

  • The strike price represents the price at which the option buyer can force you to buy the stock from him.

Because the put was out of the money when you sold it (it has a strike lower than the current stock price) your basis for the purchase will be lower than the market price for the stock was when you initiated the option trade – effectively a discount. In fact, the sophisticated options pricing models used by professional options market makers usually have this change in volatility built in. In the highly unlikely event, the company goes bankrupt; you’d lose the same as if you’d bought the stock outright.

Be careful about selling options right before or after quarterly earnings announcements in the stock. Implied volatilities (especially in short dated options) tend to rise going into a scheduled announcement because of the potential of a surprise beat or miss to move the stock quickly. Volatilities will then decline sharply after results are announced and any resulting move in the stock happens.

Certain types of implied warranties must be specifically disclaimed, such as the implied warranty of title. “As is” denotes that the seller is selling, and the buyer is buying an item in whatever condition it presently exists, and that the buyer is accepting the item “with all faults”, whether or not immediately apparent. This is the classic “buyer beware” situation, where the careful buyer should take the time to examine the item before accepting it, or obtain expert advice. Obviously, there’s risk associated with this strategy because if the stock price continues to decline, you own it and will suffer losses. It’s the identical risk you assume whenever you buy a stock, except it’s reduced by the option premium you collect.

Since traders are willing to pay more for options on a stock that is moving, or likely to move, they raise the volatility component in their pricing models, raising the price they are willing to pay for options. Here’s a simple option trading strategy for times when a stock you’d like to buy experiences a price downturn which you think is temporary and you’d like to be a contrarian and get long. This expression refers to selling your soul to the devil in exchange for power, money, etc.

If you were thinking of buying the stock anyway, selling out of the money puts can be a less expensive way to go about it. If the stock continues to decline through the strike price of the put you sold, the option will end up in the money at expiration and you will be obligated to buy the stock at the strike price. Recall that you were originally considering buying 1,000 shares of Tiffany & Co. stock outright at $29.10 per share. Instead, because of the options being exercised, you own 2,000 shares at a net cost of $14.20 per share.

Since you wanted the stock anyway, planned on holding it for 10 or 20 years, and would have been in a huge unrealized loss position were it not for the fact that you chose to write the options, you now ended up with the Tiffany & Co. The moment the trade executes, you’ll earn $11,600 of cash for your options, minus a broker commission. It’s your money forever and it represents the premium the other investor, or option buyer, paid you to protect him from a drop in Tiffany’s stock price.

sold

However, you weren’t sure how to proceed since the current market was experiencing high volatility and you had seen falling stock prices over an extended period. As is, when employed as a term with legal effect, is used to disclaim some implied warranties for an item being sold.

What sold means?

verb (used with object), sold, sell·ing. to transfer (goods) to or render (services) for another in exchange for money; dispose of to a purchaser for a price: He sold the car to me for $1000. to deal in; keep or offer for sale: He sells insurance.

To illustrate the “short” concept, if you sell the stock short this means you borrow it from your broker and sell it to another investor without owning it. A more interesting, and perhaps more profitable, scenario using an options strategy can also put your capital to work. Using a special type of stock option, you can create something akin to writing and selling an “insurance policy” for other investors who are panicked about a potential crash in Tiffany & Co.’s stock price.

Example sentences from the Web for sold

sold meaning

Although the market offers no guarantees, this strategy could reward you with some profitable returns on unleveraged equity in an extremely volatile market. Novice traders should understand that the strategy also represents high risks. If Tiffany’s stock price falls below $20 per share between now and the option’s one-year expiration date, your put option contracts might require you to purchase 2,000 shares at $20 per share for a total of $40,000. You can add the $11,600 to the $29,100 cash you were going to invest in Tiffany & Co. common stock, for a total of $40,700. The buyer of the options is never obligated to exercise his right to sell their stock, but when the stock price keeps dropping, the option provides the investor with the ability to sell at a set price.

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