Selling Puts Strategy: Comprehensive Guide
selling puts strategy

Selling Puts Strategy: Comprehensive Guide

Want to learn the best way to be a profitable trader?

Then read about the selling puts strategy outlined in this post.

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.

Selling Puts Strategy (Key Points)

  • When selling puts, you need to hedge your tail risk
  • You must be committed to constant improvement and try to always reduce your risk if you want to maximize your returns.
  • You should only trade options on indices and ETFs like SPY, IWM and QQQ or market leading stocks like Amazon, Lockheed Martin, JP Morgan, Microsoft etc.
  • When you sell puts or calls on positions that are trading at price extremes, you are giving yourself an advantage by having a large safety net (and you also collect a lot of premium)
  • Running the "Option Wheel Strategy" is okay as long as you want to own the underlying stock at your strike price so that you can participate in the upside potential

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 winning 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:

1) You're able to collect a large amount of option premium.

2) 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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Selling Puts Strategy: The Best Way

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 puts usually allows you to collect the most amount of premium.
  • I recommend put spreads because it offers protection against large volatility swings and corrections in the stock market.
  • When a naked put position is challenged it is easy to roll and manage it.
  • Sign up for Trade Alerts – Receive real-time trade alerts so that you maximize your profits and minimize your mistakes; we have a Trial Offer of $19 for 7 days.

"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. 

If you want to learn about more options trading examples, enter your e-mail address below and receive $400 worth of free training. 

According to my readers, these free materials are significantly better than many other paid materials. 

If you have questions, leave them in the comments section below and I will be sure to answer . Thank you!

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.

About the Author David Jaffee

I (David Jaffee) help people become consistently profitable traders while minimizing risk. I graduated from an Ivy League University and worked at some of Wall Street's most successful investment banks. Subscribe to my YouTube channel for valuable videos - BestStockStrategy YouTube Channel​. Finally, if you're looking to Land a Finance Job, then I've put together the best step-by-step course at LandaFinanceJob.com. My personal website is DavidJaffee.com.

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Leave a Comment:

34 comments
David Batrum says July 15, 2020

This article is great!

Reply
Dr Steven Krahl says July 1, 2020

Mr Jaffee, this is a serious question, can we discuss you being my mentor and the opportunities that can arise from the relationship? Hope to hear from you. Thank you.

Reply
    David Jaffee says July 2, 2020

    ok

    Reply
MARK HERNANDEZ says June 30, 2020

david i have think or swim paper money
i practice but dont have the slightest clue what im doing.
i really need to start from the bottom.
i make tunnels for a living,so talk about starting some thing new ,i love it.
hope i here from you.thanks mark

Reply
Kathryn Joseph says February 16, 2020

Hi- I have been selling naked puts for a few years and do well, but want to branch out a bit to more stocks besides AMZN, NFLX, ROKU, ADBE…I pretty much stick to weekly or two week trades. Does your program send specific alerts or do I have to go down lists and look for which fall within a certain criterion etc. I don’t like searching for new opportunities much. Right now I make about $1000 – $1500 per week and sometimes have to wait a month or more to close a trade if it goes against me by rolling it and reducing it, all things you write about, to still gain not lose.
Thanks
Kathryn Joseph

Reply
    David Jaffee says February 17, 2020

    Hi. You emailed me as well and I answered this via email.

    Reply
Ricki Knellinger says February 10, 2020

This blog about The BEST Selling Puts Strategy To Earn Trading
Income [David Jaffee]. has helped me enormously,
is a very good topic.

Reply
Lena Kocik says February 7, 2020

This blog about The BEST Selling Puts Strategy To Earn Trading Income [David Jaffee].
has helped me enormously, is a very good topic.

Reply
Frolep rotrem says January 21, 2020

I’m very happy to read this. This is the kind of manual that needs to be given and not the accidental misinformation that is at the other blogs. Appreciate your sharing this greatest doc.

Reply
Put Selling says September 18, 2019

Really, there have lots of matters in the selling puts strategy and most of the people don’t know properly that how they invest and become beneficial so they must need to take a course of put selling to maintain the strategy.

Reply
    David Jaffee says September 18, 2019

    Thanks for the comment.

    Reply
Roman says August 3, 2019

I really like this example and your content. I wanna sell puts in my Roth IRA and they would be cash secured since I can’t use margin. Do you think that’s still a good idea?

Reply
    David Jaffee says August 4, 2019

    It’s not a bad idea. I would recommend a margin account though.

    Reply
forex fury download says July 19, 2019

Very informative, thanks for keeping us up to date pertaining to your
trading development.

Reply
Laurine Cool says July 13, 2019

Hi there, great post! I was hoping you could help me with something. I was wondering, I’m curious the difference between insider trading and a trading scheme. Do you know the difference? I really appreciate any advice you can give.

Reply
fury ea says July 12, 2019

Very educational, thank you for keeping everyone up to date relating to your investing development.

Reply
Jennifer Birnie says July 7, 2019

Very insightful, thank you for keeping everyone up-to-date
on your investing strategy

Reply
nation says June 29, 2019

Very useful, nice one for keeping us all up to date relating to
your trading success.

Reply
Robot Nation says June 15, 2019

Many thanks for this, I’ll go ahead and absolutely readily share it with my customers.

Reply
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Reply
    David Jaffee says May 1, 2019

    ok

    Reply
JP says April 26, 2019

David, first I like your site and style. Your recent blog on success is great and your review on Options Alpha is interesting to say the least. That said, I’ve tried selling options several times over the last 15 years. I also used a couple of managed fund to trade them…both had huge losses in Feb/Mar 2018 (one went belly up…ouch).

The problem I’ve seen are
(1) It works until it doesn’t. You sell some nice naked puts or spreads during, say 3-10% pullback in the market. After some wins you try again and suddenly the market keeps falling another 10-15% (happened twice in 2018) or even 40%+ (2008 and dot-com bust a few years before). During those times, you either suffer huge losses or try to adjust your way out of it…which still often results in huge losses unless your timing/luck is incredible.

2) You also have to wait and wait if the market doesn’t have meaningful pullbacks (2019 so far, the late 1990s, most of the time when the market rallied between 2009-2017). How do you make money when the market remains bullish and non-volatile for long periods?

Reply
    David Jaffee says April 26, 2019

    Hi. Great comment. I don’t have all the answers. My thoughts are as follows:

    1) If Feb or Dec 2018 caused massive losses then… you traded too big and too aggressively.

    Many people (not me) actually made money in those months.

    2) I don’t think there’s any other way to trade than to pick your spots and be patient.

    You’re also reducing risk by being patient.

    I trade much less frequently than I used to, yet my results are the same (and I have less stress).

    If you’d like to discuss, you’re welcome to book a call https://beststockstrategy.thrivecart.com/30-minute-call/ or take the alerts at https://beststockstrategy.com/memberships/

    David

    Reply
      JP says April 27, 2019

      Thanks very much for the response. Do you mind saying what you netted in 2018? Your home page mentions your 2017 profits and shows a statement for July 18. Did you have an overral profit in 2018 despite down months like Feb, Oct and Dec? Thanks.

      Reply
        David Jaffee says April 27, 2019

        Overall, I was up around 12% in 2018. However, I was up 40% heading into Q4 and lost a decent amount in Q4. The January 2019 volatility contraction allowed me to recoup almost all of the Q4 losses.

        Reply
Keith says April 12, 2019

Why are you against covered calls? Isn’t that selling options too?

Reply
    David Jaffee says April 12, 2019

    I’m not against selling covered calls, except it’s not capital efficient. You should choose the best strategy, not a “decent” one. Selling covered calls is decent.

    Reply
Michael says April 8, 2019

I’m ready to sign up but I don’t understand how you send your live daily trades and comments.

Reply
    David Jaffee says April 8, 2019

    Hi. I just sent you an email.

    Reply
James says April 2, 2019

Hi David, I love your strategy ! I just used it to sell a put on LockheedMartin. On 28 March, I sold the $275 May 17 put for $3.00 (stock was trading at $294) I bought it back on 2 April for $1.30 (stock at $306). Thanks !

Reply
    David Jaffee says April 3, 2019

    Great job on the LMT trade, I sent a similar trade to my trade alerts subscribers.

    My trade alerts students receive profitable trades all the time. You may want to consider joining.

    Reply
mark says March 24, 2019

do you sell strangles, also are your put trades in the money and out of the money
thanks

Reply
    David Jaffee says March 24, 2019

    I do not sell strangles. I sell puts that are out of the money.

    Reply
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