In my last post I explained how Selling Put’s can be used by the conservative investor to buy stocks at a lower price during almost any market conditions. You can read that story to better understand how Selling a Put works.

In this article I’ll talk about how to either make a living or supplement your income by Selling Put’s for a profit.

Summary

1. In this case we want to Sell Put’s on stocks what we just want to collect the premium on, and not necessarily want to own the stocks.
2. Using Regeneron (REGN) stock as an example, the current price today April 20^th is $400/share.
3. I’m looking at the May 20^th $360 Put’s, paying a premium of $5.50 per contract (100 shares).
4. Therefore, if I Sell these Put’s I get $550 immediately in my account per contract. I am looking for the price of REGN to be at or above $360 by the May 20^th Expiration Date. This is roughly 10% below the current selling price.
5. If the price of REGN is below $360 on May 20^th I must either buy the stock, or just buy out of my Put position. My favorite web site shows that this trade has an 81% chance of “expiring” which I want it to do, and my return is 1.42% for 30 days or 17.24% annualized.
6. As a sanity check I check out the REGN stock chart and see that the lowest price in the last 12 months has been about $359 and the stock has bounced off its bottom and is above its 50 EMA.
7. This might be within your risk tolerance.

Here is what a Put contract looks like in your account. This contract is REGN 160520P360, it looks cryptic but it’s actually easy to understand. REGN (the stock) 160520(Expiration Date of 05/20/16), P360 (means a Put with a $360 Strike Price).

Here is what a Fidelity order entry screen looks like for a 3 contract transaction.

Here is what the REGN stock price chart looks like, notice the move above the 50 EMA live, a positive sign.

I always double check my Put Options trades with my favorite Options site: www.stockoptionschannel.com , here is what it said. This trade has an 81% chance of “expiring” worthless, which I want it to do, and my return is 1.42% for 30 days or 17.24% annualized.

So can you make money doing this, yes, once you understand it and manage your risk. Here is a copy of my monthly Options Trading spreadsheet for July 2013. You can decide how much risk/reward you are willing to take.

You’ll notice that the above sheet also shows some Call Options, I’ll explain these in a future article.