Writing Puts in Options Trading

Writing puts in options trading is the same as selling puts. The seller of a put option sells the right to sell a stock at a set price, the strike price, on or before a future date. In return the writer or seller of the put option receives the payment of a premium. Writing puts in options trading is done when the writer believes that a stock price is stable or will go up. The buyer of a put believes that the price of the stock will, or may well, go down. Of the various kinds of options trading, writing puts can be the most dangerous or it can be very profitable. 

It is always wise to practice risk management in options trading. In the case of writing puts in options trading it is important that the put seller or writer be very sure of the trend of the underlying stock. The profit from selling puts lies solely in gaining the premium when a previously volatile stock stabilizes or a stock on its way up does not correct, as the buyer of the put think possible. 

The risk of writing puts in options trading is that the underlying stock will fall in price and that the buyer of the put will exercise his or her option. In that case the amount of loss for the option writer will be the amount that the stock drops in price below the strike price multiplied by 100 shares for each contract written. The potential loss is the entire value of the stock. Thus this options trading technique should be reserved for those with substantial experience in options trading and in depth knowledge of the stock involved. It all has to do with predicting the future difference between strike prices and spot prices in options trading. 

The trader needs to ask himself or herself when is trading put options a good option? For the owner of a stock that has gone up dramatically buying put options on the stock insures against a precipitous correction. There are individuals who were not wiped out when the dot com bubble burst because they used exactly this technique. They bought put options on their stock. Those who believed that writing puts in options trading on the same stocks did, in fact, suffer serious financial loss. 

If put writing were always incredibly dangerous no one would ever write puts and no one would ever be able to buy puts. But, these options contracts are bought and sold. When trading options in relatively stable stocks the risk of selling puts is substantially offset by the premium paid. For someone with intimate knowledge of the underlying stock this options trading technique can be a recurrent money maker. This individual may well be a person who is making a living trading options which means they have the time to devote to detailed study of appropriate stocks and market conditions. Writing puts in options trading is probably not a options trading technique that should be used by someone who engages is occasion options trading. When writing puts it is all important to know the underlying stock and its market sector very well. It also important to have sufficient capital reserves in case of loss.