Selling Equity Puts?

Question

I am an options trader who is interested in selling equity puts for an income stream. I just want other people's opinions on this strategy and maybe a few traders who have successfully practiced this strategy. Should I stick with it or find a new stream?

Answer 1

While Box815 is correct that put sellers tend to have a lot a small profits and a few large losses, he is more negative than I would be.

While I would never consider selling puts as my only investment tool, I see nothing wrong with selling some naked puts as one of several investment tools.

I would suggest you establish some guidelines, such as

-- Never sell so many puts on any one equity that a major drop in that equity would do serious harm to the value of your portfolio.

-- Don't look for the highest premiums available. The highest premiums available are associated with the most dangerous equities. Instead, look for equities you think are attractive at their current price, then see if there is a put that you believe offers enough premium to justify the risk.

-- Close or modify a position, regardless of the profit of loss at the time, if the risk involved no longer justifies the current option premium.

If you have not already learned alternative options strategies, indluding different types of spreads, do so. I think you will find there is usually a spread that is more attractive than naked puts.

Remember if you sell cash secured naked puts, the risk/reward profile is the same as the profile for covered calls. I find it ironic that naked puts are considered risky and speculative by most investors, while covered calls are considered conservative. The only reason naked puts should be considered riskier, IMHO, is that you can open larger positions. However, you have contral over how large a position you open. Just because you can open a larger position does not mean you should.

Answer 2

You're not much of a trader then.

That's stupid. You'll make $1000 a month 10 months in a row then lose $25,000 at once.

There's a reason most traders look down on put sellers, because put selling is the crack cocaine of trades.

Answer 3

Selling equity puts work only during Boom times when the market is steadly rising. Other wise during mixed or downturn you will loss will be limitless.