Many people know – how to buy Puts and Calls but very few know how to sell them or
know that they can sell them and get the premium money for the Option.
When you sell a Put or a Call on stocks, you are simply taking the, opposite position to
the one when you buy a Put or a Call and there are more advantages on the selling side,
especially at certain periods of the market.
Suppose you wish to buy U.S. Steel Naturally, you want to get in the market and buy
at the lowest level possible, but you cannot be sure of the exact bottom. For example: We
will assume that U.S. Steel is selling at 66, and you feel that you would be willing to buy it
if it declines to around 62. You have your account open with your broker and your money
on deposit to cover the margin requirements to buy U.S. Steel. You give your broker an
order to sell a Put on 100 U.S. Steel good 30 days – which is always below the market,
varying from 2 to 3 points to as much as 10 to 15 points. We will assume that the broker
sells the Put on U.S. Steel at 62, good 30 days, and receives $112.50, which is credited to
your account. This is the premium that you receive from the buyer. Then, we will assume
that U.S. Steel does not decline to 62 before the 30-day Put expires. Therefore, you will
have the $112.50 which you received for the Put.
Then, if you are still willing and want to buy U.S. Steel, you could sell another Put an
100 shares, good for 30 days, at whatever number of points below the market the broker
could get it. In this case, we will assume that Steel is selling around 63 and the broker sells
the Put for you at 59, again receiving $112.50 credited to you r account. Then suppose U.5.
Steel declines to 58 and closes at the end of 30 days at 58. The man who bought from you
the Put on 100 U.S. Steel at 59 will put it to you or deliver it to your broker for 59 and you
will have bought Steel at 59 and will have $250.00 to your credit, the money you received
on the Puts sold.
Then, we will assume that you are willing to take 4 or 5 points profit on U.S. Steel.
You give your broker an order to sell a Call on U.S. Steel good 30 days. We will assume he
sells it at 64 and again you receive $112.50 premium. If at the end of the 30 days U.S. Steel
has not reached 64, you still have the stock and have $375.00 to your credit, which you
have received for selling Puts and Calls.
We will assume that at the end of the 30 days U.S Steel is selling, at 63. You instruct
your broker to sell a Call on U.S. Steel good 30 days, and he sells it at 67 and receives
$112.50 for your account. At the end of the 30 days, or when the Call expires, U.S. Steel is
selling at 69 and the man to whom you sold the Call demands , delivery; then your broker
delivers 100 U.S. Steel For 67. You have sold at 67 the Steel that you bought at 59 and
have made 8 points profit or $800.00, less commission and interest, and you have received $450.00 premium money for the Puts and. Calls you sold, which is just that much extra profit because you did not take as much risk as you would if you had just bought U S Steel or sold it without selling the Puts or Calls.
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