How to sell otm put options pdf download

I found that often I was closing too late on downturns and my profit was almost gone by the time commissions were taken into account. By following rules 9, 10 and 11, I found that I was more consistent in earning income every month. Some months all the trades worked out and in other months only the furthest out of naked puts did, but the returns on an annual basis kept growing and the losses were minimized. Lower volatility often means a stock has not had large price swings.

However lower volatility also means smaller premiums so it is a trade off. For example in the chart below for the same strikes for Toronto Dominion Bank, the volatility is not overly high, but then the premiums are not as great. Higher volatility though meant more often I was either buying to close my puts early; having to close early because of a pull back; had more trades with higher losses; whipsawing of the stock.

Lower volatility while it presents lower option premiums also provided me with far more trades that were overall profitable. Finally although there are lots of investors who disagree with me, I found that the greeks as a whole did not really assist in my stock selections and put strike selections.

Please don't bother to write me about the importance of the Greeks. I do get it. I understand what Gamma, Theta, etc is all about and why some people love them and wouldn't even trade without them. But honestly, stocks move around a lot more than investors realize.

Delta in its simplest of form is a quick way to determine what are your "odds" of the stock reaching your strike point before the expiration of those month's options. The greeks change all day long and every day, so honestly I prefer the to really figure out if a stock is in an uptrend and my chance of assignment are low.

But at least Delta helps a bit. Those are the 13 guidelines I follow when selling puts against stock I do not want to ever own. Remember that losses can be large on any investment or investment strategy. These are the rules or guidelines which I developed after paper trading for many years. I suggest every investor interested in selling puts, paper trade first and establish their own set of guidelines or rules. Every investor has their own risk level and investing goals. It is important to learn what they are before entering into any investment.

Disclaimer: There are considerable risks involved in all investment strategies. Stocks, options and investing are risky and can result in considerable losses. None of the strategies, stocks or information discussed or presented are financial advice, trading advice or recommendations. Everything presented and discussed are the author's ideas and opinions only. By using this site, you agree to be bound by its terms of use. The full terms of use can be read here.

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Put Selling. Why Sell Puts. Example Trade- Selling Puts. Understanding The Naked Put. Caterpillar Naked Puts. Rolling Put Options Strategy. Covered Calls. Rolling Covered Calls Down. Staying Positive. Other Strategies. Moving Averages On Cisco Stock. Writing Uncovered Calls. Long Straddle. Early Warning Tools. The Cautious Bull. You should maintain at least four different option positions with different underlying stocks. Remember, one of your overall goals is to stay in the game, and the best way to do that is to avoid betting all your money on one horse.

Although the odds are heavily in your favor, losers can put you out of the game if everything you have is bet on that one position. Finally, maintain very small positions in each stock so that a takeover does not nail you with a devastating loss. The only options you should consider as writing candidates are those with no real intrinsic value, that are not in the money. Use only those options that are out of the money, which only have time extrinsic value.

Furthermore, you should select options that are significantly out of the money so that it will take a strong move in the stock—a move that normally would not occur in a two- or three-month time period see secret 7 —to hit your bailout parameters.

These out-of-the-money options have a low probability of ever being exercised, or of ever having real value, and this low probability is a strong advantage to the naked options writer. In other words, choose to sell options that have the highest probability of expiring before the stock price ever gets close to the strike price. Remember that as an option approaches expiration, its rate of depreciation normally increases, especially in the last month.

Consequently, these are the times to write naked options. You will receive a higher rate of premium in the last three months of the option than at any other time in its life. The shorter the time before expiration, the better. One of the most important secrets to successful naked option writing is to only write options that have been overpriced by the market, i.

This will add insurance to your profit potential and is an important key to successful option writing. When writing options, you must put up a margin requirement. The margin requirement can be in the form of cash or securities. It can be also be in the form of Treasury bills. If it is the form of securities, you can only use the loan value of the securities.

However, Treasury bills are treated just like cash, and this is one major advantage of using them. Below is an example from my put selling calculator which shows the potential to earn a The trade off is the reduced downside protection as the trade is only protected against a 2. If we sell a 32 day put option we generate a 1.

By generating more premium we also have slightly more margin for error until the breakeven price. Free Covered Call Course. Would you prefer the short-dated trade with a much higher annualized return but less downside protection? Or would you prefer the monthly trader with a lower annualized return but higher downside protection? Selling LEAP puts is an entirely different strategy with a much different risk to reward ratio, particularly when compared with selling weekly puts.

For this reason, the trade only generates an 8. Also, with this style of put trading, you would be exposed to multiple earnings announcements which could potentially have an adverse effect on the stock price.

Selling LEAP puts is a great strategy on companies that have a long history of dividend increases. If you think about it this way — if we bought VZ today for If that option gets assigned, the effective purchase price would be the strike price of If you stick to strong companies that have a history of raising dividends that will give you a good chance of success.

Nothing is ever guaranteed of course and during recessions and bear markets there is also the risk of a sharp drop in stock price or a company cutting their dividend. If you really want to take your put selling to the next level, you can start doing wheel trades. The basic idea is that if you are assigned on a stock you then sell a covered call until the stock eventually gets called away and collect the dividend while you wait. At the right side of the above diagram, if you end up being assigned shares, then you will have also collected five lots of option premium from selling puts and calls.

You can then sit back, collect the dividends and keep selling two calls every month or week etc. A great time to sell put options is during a bull market when the market is undergoing a correction. When the stock market undergoes a correction, implied volatility rises as investors start to panic and pay more for protection in the form of buying put options.

Of course, you need to be careful because sometimes a correction turns in to a full-blown bear market which can result in big losses for share investors and put sellers alike. During the height of the coronavirus selloff, fear was high and implied volatility went through the roof.

A PDF set of instructions for how to use the spreadsheet. The output area automatically calculates a result for you, based on your inputs. This helps you identify risks ahead of time. It works on just about any type of publicly-traded company, whether they pay a dividend or not. The instructions walk you through each of these methods step by step and explains how they work.

You can even upload it to Google Drive and use it on the cloud like a web application.