Steps To Sell A Put Option

September 12 2017

The purpose for this post is to reach an audience of people who want to know the steps to sell a put option in the options market. If this is you, I provide step by step below to get you on your way. Personally, I trade cash-secured put options rather than naked put options, as the latter is very risky, if you don’t have money to cover. Although executing the trade is the same, if you are just starting out, stick to what is safe.

The example I provide is on the E*TRADE trade platform, but the steps should be similar on any other trading platform you find.

Step #1

Open Individual brokerage account with E*TRADE. Preferably with a margin account, so you don’t have to go back later to switch if you feel the need to have one. On this section, be truthful so as to allow to be saved from yourself.

Step #2

Under Trading, select Options House and the following window should appear.

Step #3

In the box outlined in red, enter the ticker symbol or company name you intend to sell put option for. In further examples, I use CTRL and NTNX stocks as you can purchase 100 shares for under $2500. Then select the Options Chain outlined in blue.

Step #4

You will see a window as follows which is referred to as options chain. I have outlined in different colors the items you need to sell a put option.

Outlined and arrow in purple is the ticker symbol NTNX
Outlined and arrow in pink is the month in which the option will expire. These are monthly options which expire every third Friday of each month

Step #5

Next, select a strike price one or two positions out of the money

Outlined and arrow in green is the strike price(s). I usually trade one to two strikes out of the money (the strike you choose is entirely up to your preference; however, you can see the profit potential goes down the further out your strike price is from the underlying stock). We will be only looking at items to the right of the Strikes column in the middle

Step #6

Outlined and arrow in yellow is the bid(s). This is the premium (credit) that a put option seller (that is you) receives. If sold at either of the two strike price(s) below of $17.5 or $20 (outlined in green), you would receive $20 (¢0.20 x 100) or $75 (¢0.75 x 100). One options contract always consist of 100 shares of the underlying stock. In this case, NTNX. Take for example the 20 strike, if we sold this option, we are obligated to buy NTNX at $20 per share. If the stock price is at or below $20 anytime before the Oct17 expiration and the buyer of the option we sold wishes to exercise his option, we would be put the stock at $20 per share of 100 shares. That strike was the agreed upon strike price.

Click on one of the bid outlined and arrow in yellow, and a pop up order ticket comes up shown below. Examine the specifics of the order. The action, quantity, expiration, strike, and type. I usually select a limit order at the midpoint between bid and ask. The order ticket shows description of the order and estimated credit you will receive from the trade(excluding commissions)

Step #7

If you click on the Snapshot Analysis tab next to Order Ticket, it gives a breakdown of probability and profit/loss for the trade. Max Loss is assuming the stock goes to zero.

Step #8

If you click Preview, it shows you credit you receive minus commissions of $74.53. Then, click Send and the trade will get executed and should show as filled.

Step #9

Once filled, it will appear under your Positions tab. This is monthly option, where now that the trade is in you can sit back and monitor the position.

Step #10

I will only outline 3 possible outcomes as to not overwhelm you at this moment. 1.) Close the position early, 2.) option expires worthless, 3.) prepare to be put the stock.

Close the Position Early

In the above image from Step #9, if the market value -110.00 were to decrease in value down to say -20, you should consider to close the position. This implies a movement in the price of the underlying stock that the value of option to market is only $20. Since you collected $220 (the cost value), you could profit $200 (excluding commission) now instead of waiting for the options expiration. If we clicked on the position, the following box comes up. We click the close.

Then, we basically go in reverse of Step # 6. We buy back the option we sold at the strike we selected.

However, this time we have to pay the ask. This winds up being a debit from us $120, if we were to close early. Our net would still be $100 (excluding commissions) ($220 – $120).

Option Expires Worthless

If the options expiration comes, of Sep17, and the buyer has taken no action between the time we sold the option because the strike price is not $22.5o or less, we need not take any action. The option we sold expires worthless. If a secure put was done, we retain our cash because we don’t need to buy the stock. We can then repeat the process from Step #3.

Prepare to Be Put the Stock

If the options expiration comes, of Sep17, and the buyer has taken action to exercise on the option because the strike price is $22.50 or less. We need to be prepared to be put the stock at $22.50 a share for $2250. If a secure put was done, we give up our cash because we agreed to purchase the stock at that strike. It is a secured put because we have the cash to pay for the stock on hand. It is beyond the scope of this post, but from having the stock we would switch to strategy of doing covered call. This strategy will be covered in later blog post.

Things to Note

With the premium(credit) you received, you can reinvest, let it sit in your account or transfer out of your brokerage account. Regardless, of the 3 outcomes from Step #10, all or some of the premium remains yours. It is considered a short term gain, so taxes will need to be paid to Uncle Sam at your marginal tax rate when you report you taxes.

In Closing

These are the steps to take to sell a put option for a premium in the options market. This can be done continually to generate a steady stream of income without much money to outlay. I hope this helps you take that leap to get started trading options.

More Options Blog Post for your reading enjoyment