When it comes to selling put options, there are several key pointers to keep in mind.
One, only sell put options on stocks you’d like to own and have a better than average chance of moving higher prior to expiration. Two, only sell enough contracts that fit your personal comfort zone. If you normally 100 share blocks, then only sell one option contract.
Three, if your uncomfortable during the trade, or don’t wish to own the stock at all, you can always unwind the trade by buying back the put options you sold. Four, you must always know your potential risks and outlays if a trade should go against you. You don’t want any surprises.
For example, when selling puts, you are expose to bigger losses should the stock fall below the strike price. At expiration, if the stock is below the put strike you could be “put” the stock and assume the loss represented by the amount the stock is currently below the put strike less any net premium that was collected.
And five, you must make sure you are approved to sell put options with your broker, which leads to the question, “Which broker?”
While we can’t offer any specific brokers, here is a list of the top ones in the industry.
- eTrade.com (etrade.com) – (800) 387-2331
- Tradestation (Tradestation.com) – (800) 808-9336
- Options House (OptionsHouse.com) – (877) 598-3190
- TD Ameritrade (TDAmeritrade.com) – (800) 454-9272
- Scottrade (Scottrade.com) – (800) 619-7283
- OptionsXpress (OptionsXpress.com) – (888) 280-8020
- Fidelity (Fidelity.com) – (800) 343-3548
- Interactive Brokers (InteractiveBrokers.com) – (877) 442-2757
- Charles Schwab (Schwab.com) – (800) 435-4000
Those are in no particular order. Those were just the ones we did a good deal of research on.
With such a list, it’s important that you narrow down what may work best for you.
The criteria for selecting your broker could include research into:
- Speed of order executions
- Ease of use
- Site security
- Customer support issues
First, as you choose your online broker, try not to get caught up in the glitz. One site may offer 50 first free trades. Another may offer commission free trades for three months.
While those are nice offers, it’s a marketing tool. Do your research first.
When it comes to commissions and fees, you are charged something on each and every transaction. Sometimes there are other fees for deposits and withdrawals, or extra fees for special orders. Be aware of all commission structures and applicable fees so you’re not being taken to the bank.
Speed of order execution is important, as well.
If you’re transaction isn’t placed quickly enough, it can negatively impact your trade. If not placed fast enough, it could very well impact if your trade is placed at all. The best brokers out there will place your trade as quickly as possibly, ensuring best trade possible.
Plus, always make sure your broker’s site is fast and responsive.
If the site has a tendency to move slowly, you may want to move on. The last thing you want to experience is a slow site that can lead to missing profit opportunities, or misplaced orders.
Make sure there’s ease of use.
The last thing you need to see is an unorganized mess that’s hard to navigate or understand.
Are security measures up to par?
Ask around, do your due diligence. Does your preferred online broker have a trustworthy site that can’t be hacked? Identify and ask questions to see what security measures are in place.
The last thing any of us need to do is lose money, especially to a hacked site.
Make sure the site has a good reputation.
Some of the best online brokers – as mentioned above – have great track records for high quality servicing to customers. Stick to what’s well known and used often, and you can sleep better at night. We mentioned those sites above to help make your decision-making process a bit easier, too. They have some of the highest qualities.
Consider the knowledge and level of customer support.
We’ve all been through poor customer support issues before.
And as always – it’s inexcusable. If you get some one on the line that has no idea was a limit order is for example, move on. If you get a guy on the line that’s rude or places you on hold without a care in the world, move on. It’s your money at stake.
Most of all make sure that you are comfortable with the choice you’ve made.
Once you’ve chosen your broker, now you want to seek approval to sell options.
To sell put options, typically you need to be approved for Level 3 clearance. This will allow you to do everything the first two levels allow, including covered calls, long calls, long puts, and collar, as well as spreads and naked put options.
For example, here’s how the choices look at eTrade.com.
In order to be approved for Level 3, you must typically trade on margin. It’s best to check with your broker to verify all of this information before proceeding.
Some will allow you to sell a cash-secured put, which obligates us to buy the stock if the strike price is exercised on a put sell. If ABC is trading at $44 for example, and well sell on out of the money $40 put for 50 cents, we would set aside $50 plus the total cash investment required. So let’s say the total cash investment required was $3,500. We’d set aside $3,550 should we be forced to buy back the stock.
If you trade on margin, let’s assume 25% for our example.
So, your margin would be 25% of the underlying stock subtracted by the out of the money amount + option premium, multiplied by the number of contracts, multiplied by 100 (shares in each contract). Here’s the math — [(25% x $44) – $4 + 50 cents] x 10 x 100.
Check with your broker, though to be fully aware of any margin requirements.
This was just an example.