Tip #1 – Choose Stocks You Don’t Mind Owning
For put sells, pick stocks that you wouldn’t mind owning if you had to buy. Remember that put selling is also for those who want to buy a stock at a discount to the current price.
If you want to buy XYZ at $30 and it’s trading at $32, you could sell a 30 strike put, collect the premium, and wait for the stock to decline. If it doesn’t hit $30 before expiration, you keep the premium and sell another put. If the stock moves to $34, perhaps you could raise your “buy” price by selling a 32.50 put. In any case, you’re being paid to wait for the stock to dip to your entry price. Not a bad deal, huh?
On the other hand, don’t sell a put on a stock that you are wildly bullish on. Since a put sell’s gain is capped at the amount of premium received, you’re better off buying the stock or a call option if you anticipate a strong move up. That way you’ll be able to take advantage of the stock’s full move, rather than just a put staying out of the money.
Learn more about selling puts to buy stocks at a discount.