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Learn what happens when a selling put option strategy is initiated.

14 Mar 2023

What is a Put Option Strategy?

A put option is a contract that gives the owner the right, but not the obligation, to sell specific underlying securities at a fixed price within a specified time period. The seller determines the contract's terms. The buyer pays the seller a predetermined amount per share (a "premium") to acquire the contract.

Each contract is worth one hundred shares of the underlying stock. Investors do not need to hold the underlying stock to purchase or sell a put. As a reminder, put options, like call options, are considered derivatives since their value is derived from another asset (e.g., index, bonds, stock or currency).

Selling Put Option

Put sellers (writers) must purchase the underlying stock at the strike price. The put seller must have sufficient cash or margin capacity in their account to purchase the shares from the put buyer. A put option strategy usually is not executed until the stock price is below the strike price — in other words, unless the option is "in the money." Put sellers often anticipate that the underlying stock will stay flat or rise. Put sellers are optimistic about the underlying stock and seeking income.

Advantages of Put Options Strategy

Selling put options remains popular because they provide additional alternatives for investing and making money. One attraction for put purchasers is the opportunity to hedge or offset the risk of an underlying stock's price decreasing. Other reasons to utilise put options are as follows:

  • Increase The Attractiveness Of Your Purchase Pricing: Put options are used by investors to get higher purchasing prices for their equities. For example, they may sell puts on a stock that they want to acquire but cannot afford right now. If the price falls below the strike of the put, they may buy the shares and take the premium as a discount. However, if the stock stays over the strike price, they may retain the premium and retry the method.
  • Make Money From The Premium: Investors may create income by selling options, which is a viable technique in moderation. In addition, selling puts may be an appealing way to generate extra gains, especially in a rising market when the stock is unlikely to be put to the seller.

Wrapping Up

Many individuals believe that options are very risky, and they may be if handled poorly. However, investors may utilise options to reduce their risk while still profiting from a stock's growth or decline. You may make a lucrative transaction by carefully timing your bids and picking the appropriate strike prices. If trading isn't your thing, you may try investing in upcoming IPOs. Whatever you select, keep a Demat and trading account. You cannot invest in the financial markets until you have one. You may open a demat account with Motilal Oswal in just a few minutes.

 

Related Articles: How to Open a Demat Account Without a Broker | Factors to Keep in Mind While Opening a Demat account | Factors to Consider When Opening a Demat Account | 10 Points to Remember When Operating your Demat Account | Types Of Demat Account & Trading Account

 

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