Selling puts can be a very effective way to get into a strong stock, while getting some cash flow on the side.
For those of you who don’t know a put option gives the buyer of the option to right, not the obligation, to buy a stock at a given price on or before a given day. It also gives the seller the obligation, not the right, to sell the stock at a given price on or before a given day.
Puts have been sold as a way of building income for years. A put seller may sell a put with a strike price below the price of the stock. As long as the price of the stock stayed above that price then they would make money.
This type of investing is dangerous. If the stock goes from $54 to $30 and you sold a strike price at $50, you would have to buy this $30 stock at $50, owe.
That is why it is better to sell puts as a way of getting into a stock. If you find a stock that meets all of your criteria and would like to buy it consider selling a naked put instead. If the stock is trading at $54 and you sell a $60 put for $10 you just made $10. Just remember not to get into more shares by selling the put then you would have bought.
Also, as long as the stock stays below $60 you are likely to get into this stock. You will have effectively gotten paid to enter a stock position you were already going to enter.
If the market crashes and the stock goes down to $30, you still get into a stock that you wanted to get into. You lost money by selling the put, but you would have also lost money by just buying the stock.
If the stock moves higher than $60 by the time the put expires then you will not get called into the stock. That may not be a bad thing. You would still walk away with $10 profit. If you still want to get into the stock you can choose to just either buy the stock or try to sell the naked put again.
For more information on naked puts visit http://www.stocks-simplified.com/naked_puts.html
For more information on trading in the stock market visit http://www.stocks-simplified.com