Sell Put
Selling a put has many similarities to the covered call strategy. We’ll
discuss the two positions and highlight the likenesses. Chapter 6 will detail
the nuts and bolts of why these similarities exist.
Consider an example of selling a put:
Sell 1 BA January 65 put at 1.20
In this example, trader Sam is neutral to moderately bullish on Boeing (BA)
between now and January expiration. He is not bullish enough to buy BA at
the current market price of $69.77 per share. But if the shares dropped
below $65, he’d gladly scoop some up. Sam sells 1 BA January 65 put at
1.20. The at-expiration diagram in Exhibit 1.5 shows the P&(L) of this trade
if it is held until expiration.
EXHIBIT 1.5 Boeing short put.
At the expiration of this option, if Boeing is above $65, the put expires
and Sam retains the premium of $1.20. The obligation to buy stock expires
with the option. Below the strike, put owners will be inclined to exercise
their option to sell the stock at $65. Therefore, those short the put, as Sam is
in this example, can expect assignment. The break-even price for the
position is $63.80. That is the strike price minus the option premium. If