– submitted Jan 16 by Don Fanstone, Member of the Kitchener/Waterloo User Group
PUT options are used for several reasons.
Puts allow you to profit from a falling stock price. This is a safer and easier way to profit from a falling stock as opposed to selling short.
A second reason is to BUY Insurance against a current holding. Buying PUTS will limit losses on either an individual stock or a complete portfolio.
The third reason is to earn income and possibly BUY good stocks cheaply.
With the current decline in many good energy companies and others such as Magna who have fallen with the market, selling naked PUTS can provide income and possibly allow one to purchase good companies at a reduced price.
Ideally, this would be done when the stock price and/or the MTI starts to rise. A DEW signal was received on Friday January 16th.
If the market continues to move up in the days ahead, selling naked PUTS on stocks you want to purchase is a trade that will reward you in one of two ways.
For example, Magna has fallen from $126.00 to $111.62 based on a recent earnings report and forecast. If you believe that Magna will rebound, Sell a Magna February 105 PUT for income of about $1.80 per share or $180 per contract, (or a Magna $110.00 for about $3.40 income per share).
If the stock falls below $105 by Feb. 20th, 2015, you will be obliged to BUY the shares. Likely a good price and you will be buying them at $105 – $1.80 or $103.20 per share.
If the stock does not fall below $105 by Feb. 20th, you get to keep the premium received.
Selling naked PUTS requires you to have the value of stock in your account if you are “PUT TO”, which means you are required to buy the stock.
Editor’s Note: If you are using VectorVest’s Options Analyzer to set-up and study the Magna trade illustration above, the trade is called, Bullish Short Put. For a free, two-week trial of the Options Analyzer, please call Support at 1-888-658-7638.
DISCLAIMER: Options trading involves risk and is not suitable for everyone. The information contained in this Blog is for education and information purposes only. Example trades should not be considered as recommendations. Options training is strongly recommended before placing any trades. VectorVest offers a basic options course online and occasional intermediate options workshops in Canada each year.