Selling a Put
Learning to sell a put isn't difficult, but it can require an individual to change their thought process when it comes to trading the market. Selling a put is a non-traditional way to pull profit from stock transactions, but it is really just another bullish strategy that can make you money when the markets are going up.
Unlike a regular stock transaction, where an individual will buy to open the position, when you sell a put you actually sell to open the trade. You may be thinking: How can I sell a stock I don't own to open a trade? Isn't it illegal to sell something you don't own? Isn't that against the law? While it may be against the law to sell a car or piece of jewelry you don't own, it's perfectly acceptable when it comes to the world of the stock market.
Another wrinkle in the trade deals with put options, which usually indicate your feelings that the stock is going to go down in value. In fact, when you buy a put, you want the stock's price to drop because that means your put is increasing in value. But when you sell a put, the opposite occurs, and you want the price of the stock to go up.
The other wrinkle is the pay arrangement. When you sell a position to open a trade, you receive payment up front, and don't need to wait until the end of the trade to collect your money. When you buy to open a position, it costs you money to enter the trade, and you don't receive payment until closing the position.
The most traditional method of selling a put option requires the individual to sell to open a position at one or two strike prices out of the money. Just make sure the put you purchase is below support and that earnings are not going to be announced until after the option has expired. The stock should be bouncing off support and headed up, which is where you want it to go.
When selling put, you have an obligation to produce the stock, if requested, so the stock should be one you wouldn't mind owning if the market turns against you. You must also have the money to buy the stock, if the need arises.
A trader who sells put options must also meet margin requirements that are established by the brokerage house. The money, including the premium you received to open the trade, is held and unavailable for trading until after expiration or until you close the trade. Selling puts require a margin of the current premium and 20 percent of the strike price
