If you are a beginner in the stock trading then you must have seen many traders selling Put Options in the stock market. Have you ever thought why a trader wishes to sell Put Options instead of buying? – It is because beginner traders confused in the standard obligations, payoffs & rewards, and risks which are quite different in selling the Put Options. Answering that question requires a lot of understanding of Buying & Selling of Put Options.
In this article, we will thoroughly discuss the reason of selling Put Options, benefits, and other important aspects related to selling Put Options.
Understanding an Option Seller
You must understand that an option seller and buyer are two different sides of the same coin. They both are looking to make profits but have opposite views of the market. Going by this, if the call option buyer is bullish about the market then it is clear that the put option buyer is bearish about the market.
Similarly, if someone is selling put option then it means he/she is expecting the market to be bullish and if someone is selling a call option then he/she must be bearish. So, when you sell a put option on a stock, it means you’re selling someone the right, not the obligation, to make someone to buy the shares at a strike price before the expiration date from them.
When a buyer of a put option pays a premium to the seller for the right to sell the shares at an agreed upon price in the event that the price heads lower but if the price hikes, then the buyer would not exercise the put options since it would be more profitable to sell the put option. Since the premium would be kept by the seller if the price closed above the agreed price. That explains; why someone sells the put option instead of buying them.
It is one of the trading strategies for traders to make profits by selling the put option and keeping the premium when the price reached about the agreed price.
If Market Looks Bullish…then Why not buy Call Option?
I’m sure you may have a question at this stage – if the market outlook looks bullish then why not buy the call option instead of selling the put option?
Well, truth is, one can do buy the call option. But, what really matters is, how attractive the premiums are. If the call option has a low premium then buying the call option would be a right choice likewise, if the put option trading at a very high premium and you believe the market will rise, then selling the put option would make a good sense. Of course, you would need to do research on your end which requires the knowledge of option pricing.
Benefits of Selling Put Option
- The important benefit of selling a put option is that you don’t need a strong bull market to make returns on your investments.
- You can buy during dips and can get a better value than the current market price.
- A big opportunity to own the underlying security below the current market price.
Selling a put option is one of the powerful trading strategies to generate income and entering stock positions rather than buying shares. This is an excellent tactic unlike buying call option where you can make profits in overvalued, flat, and bearish markets. You can even make profits in the flat market and reduce risks up to 10 percent.
Nevertheless, if you have any query or would like to add something then doesn’t forget to mention in the comment section below.