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Selling Put
Options
When you write a put, you are obligated
to buy 100 shares of the underlying stock at the strike price if the option is exercised
and you are assigned the exercise obligation. As with calls, put writing can be covered or
uncovered.
Writing a Covered Put
A put is covered if the seller has sufficient cash to purchase stock at the strike price
upon exercise of the option. This strategy can generate profits from the premium earned.
Writing an Uncovered Put
You are considered uncovered if you write a put and do not have sufficient cash to
purchase stock at the strike price upon exercise of the option (or a corresponding short
position in the stock). This strategy can also generate income through the premium.
However, if the stock’s market
price declines below your strike price, you risk having to purchase the stock at the
higher strike price. You will have some protection from loss through your offsetting
premium earnings, but if the stock price falls sharply, the premium may not cover your
loss.
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