Want to learn the best put selling strategies? Once you learn the best options trading strategies, you'll realize that the best way to make consistent money in the stock market is by selling options (specifically, selling put options).
Can you make a living selling puts? Yes, you can.
Read on to find the best selling puts strategy, as recommended by BestStockStrategy.com.
Selling Puts Strategy (Key Points)
When Trading Options, You Must Hedge Your Tail Risk
Insurance companies make money by selling insurance policies - but even they purchase "reinsurance" to hedge out disaster events like hurricanes.
I believe it's very important to BUY puts during periods of euphoria, when the VIX is trading at, or below, 15. You can also buy call options when the VIX is trading around 35.
In general, the best way to make money in the stock market is by selling options, specifically put options, using a consistent selling puts strategy.
While a decent percentage of my profits are generated from selling put options (both naked options and vertical credit spreads), it's vital to always protect those profits by purchasing options.
Selling calls does hedge out some of the tail risk, but it doesn't offer enough protection since the maximum gain on those call options is the premium collected.
As a result, you'll need to purchase options in order to properly protect your portfolio from market pullbacks and volatility expansion events.
When trading options, I target a return of ~3% a month while also reducing risk. The best selling puts strategy is used by many people who make a living selling puts.
Selling Puts for Income
It is best to sell puts and calls if you want to make a living by trading.
I mostly sell out-of-the-money vertical credit spread put options because it provides a substantial amount of protection.
The benefits of selling put options (opening a short put trade), include:
- You're able to collect a large amount of option premium.
- When selling vertical credit spreads, you're automatically hedged since the maximum loss on that trade is the width of the strikes less the credit received
In general, I recommend trading vertical credit spreads, instead of naked options because you have downside protection and spreads are more capital efficient. I also do not recommend that options traders sell in the money puts.
I believe it's especially important to sell vertical credit spreads during low volatility environments to protect against a large correction and volatility expansion (you can sell naked puts during times of elevated IV - when the VIX is trading over 25).
Traders should avoid selling too many vertical credit spreads due to the smaller buying power reduction - you don't want to be in a situation where you're unable to take assignment.
As a result, I recommend avoiding the temptation of trading too many contracts and I prefer to sell vertical credit spreads when the VIX is below 25 and then sell naked puts when the VIX is trading above 25.
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Selling Puts Strategy: Naked Puts vs. Vertical Credit Spread
Consider selling a put on XYZ at a $150 strike price and buying a $140 put, turning the trade into a spread. The total risk is $10 per share minus the credit received.
The reduced buying power for the spread compared to the naked option can lead to overtrading. For instance, some traders sell 5x more spreads than is advisable. If XYZ drops to $145, these traders may face a margin call due to insufficient account size.
Rolling naked positions is simpler as it doesn’t require constant lower-priced put buying. The premium from rolling can improve the basis or reduce the size of your naked option position.
Despite this, I suggest trading spreads. They lower tail risk, protect against large market moves, and are more capital efficient than selling naked puts. Spreads, being defined risk trades, are capital efficient as the buying power reduction equals the max loss minus the credit received.
If you usually trade five naked options, I’d advise not selling more than eight spreads, especially if your goal is to own the underlying stock. Remember, being long stock uses about 2.5x more buying power than selling a naked put, so ensure you have sufficient buying power when trading options.
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The Best Selling Puts Strategy Explained
To earn income selling puts, a strategy that accounts for 80% of my trading profits, it's best to trade only ETFS, indices and market leaders like Amazon, Microsoft, Lockheed Martin, and Goldman Sachs.
If your account size is below $100,000, limit yourself to 2 - 3 underlyings at a time. For accounts less than $10,000, stick to 1 - 2 underlyings.
A trading example includes:
XYZ, currently at $165, has been trading between $160 and $170 (its recent trading range), wait for it to trade near $160. Then sell an out-of-the-money put spread with strikes around $148 / $140, expiring in about six weeks.
This could net around $1.20 per share or $120 per contract, with a ~95%+ chance of expiring worthless, enabling you to keep the premium. In general, I prefer to close positions early, such as when the puts would trade around 40 cents a share.
Remember, not everyone profits from the stock market due to lack of discipline and risk management. Patience and commitment to constant improvement are key.
In the trade mentioned above, you'd want to avoid entering trades at inferior points, such as when XYZ is trading above $165. If it doesn't fall to $160, then simply move on to another trade.
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Selling Puts Advantages
"Selling vertical credit spread put options is your best way of making consistent profits in the stock market." - David Jaffee BestStockStrategy.com
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Conclusion: Selling Puts Strategy
Selling vertical credit spread put options is your best way to make consistent profits in the stock market.
Learn from this selling puts strategy guide and apply it to your trades so that you can begin selling puts for income and generate monthly income.
Avoid selling puts with inferior brokers such as, in my opinion, Robinhood.
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Frequently Asked Questions (FAQ)
Is selling puts a good strategy?
Yes, selling puts is one of the most profitable options trading strategies available.
When should you sell puts?
The best time to sell puts is when a stock is oversold and you're able to collect significant amounts of premium by selling an option that's about 10% below the current market price.
Why would you sell a put option?
You'd sell a put option if you believe that a stock is oversold and that it'll go up in the future. You can also sell a put option if you'd like to take ownership of the stock below the current market price.
Can you make a lot of money selling puts?
Yes, definitely. Selling puts is one of the most profitable options trading strategies.
Can you sell puts for income?
Yes, definitely. Selling puts is one of the most profitable options trading strategies. Traders sell puts for income all the time.
Can you sell puts on stocks you own?
Yes, definitely, although most people sell calls on stocks they own, this is called selling covered calls.
But you can also sell puts on stocks that you own if you want to reduce your cost basis and acquire more shares.
Can you sell weekly put options for income?
Yes, definitely. Selling weekly put options for income is a great options trading strategy.