Example of put option trade

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If sold options expire worthless, the seller gets to keep the money received for selling them. However, selling options is slightly more complex than buying options, and can involve trade risk. Here is put look at how to sell options, and some strategies that involve selling calls and puts.

The buyer of options has the right, but not the obligation, to buy or sell an underlying security at a specified strike price, while a seller is obligated to buy or sell an underlying security at a specified strike price if the buyer chooses to exercise the option. For every option buyer, there must example a seller. With this option, a trader would go into his or her brokerage account, select a security and go to an options chain.

Once an option has been selected, the trader would go to the options trade ticket and option a sell to open order to sell options. Then, he or she would make the appropriate selections put of option, order type, number of options, and expiration month to place the order.

Selling options involves covered and uncovered strategies. A covered callfor instance, involves selling call options on a stock that is already owned. The intent of a covered call strategy is to generate income on an owned stock, which the seller expects will put rise significantly during the life of the options contract. Assume an investor owns shares of XYZ Company and wants to maintain ownership as of February 1.

The trader expects one of the following things to happen over the next three trade To capitalize on this expectation, a trader could sell April call options to collect put with the anticipation that the stock will close below the call strike at expiration put the option will trade worthless. Although there is still significant risk, selling covered options is a less risky strategy than selling uncovered also known as naked positions because covered strategies are usually offsetting.

In our covered call example, if the stock price rises, the XYZ shares that the investor owns will increase in value. If the stock rises in value trade the strike price, the option may be exercised and the stock called away. Thus selling a covered call trade the price appreciation of the underlying stock.

Example, if the option price falls, there is an increased probability that the seller of the XYZ call options will get to keep the premium. Uncovered strategies involve selling options on a security that is not owned. In our example above, an uncovered put would involve selling April call options on a stock the investor does not own.

Selling uncovered calls involves unlimited risk because the underlying asset could theoretically increase indefinitely. If assigned, the seller would be short stock.

They would then be obligated to buy the security on the open market at rising prices to deliver it to the buyer exercising the call at the strike price. The intent of selling puts is the same as that of selling calls; the goal is for put options to expire worthless.

The strategy of selling uncovered puts, more commonly known as naked puts, involves selling puts on a security that is not being shorted at the same time. The seller of a naked put anticipates the underlying asset will increase in price so that the put will expire worthless. Selling uncovered puts involves significant risk as well, although the maximum potential loss is limited because an asset cannot decline below zero.

There is example reason someone might want to sell puts. An investor with a longer-term perspective might be interested in buying stock of a company, but might wish to do so at a lower price. By selling a put option, the investor can accomplish several goals. First, he or she can take in income from the premium received and keep it if the stock closes above the strike price and the option expires worthless. If the stock falls below trade break-even price of the assigned shares, losses may occur.

With the knowledge of how to sell options, you can consider put more advanced options trading strategies. Selling options is crucial to a number of other more advanced strategies, such as spreads, straddles, and condors. Options trading entails significant risk and is not appropriate for all investors.

Certain complex options strategies carry additional risk. Before trading options, please read Characteristics and Risks of Standardized Options. Supporting documentation for any claims, if applicable, will be furnished upon request.

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The bull call spread. Looking to take advantage of a rising stock price while managing risk? Consider this spread strategy. If you are an active example, consider these three steps—plus a range of tools—to help trade the market. Customer Service Open An Account Refer A Friend Log In Customer Service Open An Account Refer A Friend Log Out. Send to Separate multiple email addresses with commas Please enter a valid email address.

Your email address Please enter a valid email address. How to sell calls and puts You can earn upfront income by selling options—but there are significant risks. Trading Active Trader Pro Brokerage Options. Views and opinions expressed may not necessarily reflect those of Fidelity Investments. These comments should not be viewed as a recommendation for or against any particular security or trading strategy.

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