TradeTalks: 2 Reasons Why Traders Sell Puts

Nasdaq-listed heavyweights Alphabet (GOOGL), (AMZN), Apple (AAPL), Facebook (FB) and Microsoft (MSFT) have been the drivers of the momentum in the Nasdaq Composite. At the time of writing, the Comp was up 17%, while the S&P 500 and Dow Jones Industrial Average were higher by 8.9% and 7.3%, respectively.

“Stocks like Apple, Facebook and Google are not just a U.S. story, but rather a global technology and consumer one,” Luke Rahbari, CIO of Stutland Volatility Group and Equity Armor Investment, said.

For investors that missed out on the year-to-date performance in stocks like Alphabet, but would be willing to buy at lower levels, Rahbari recommends selling puts rather than just sitting on cash waiting for a selloff that may never come or take several months to play out. The two main reasons to employ this strategy are:

  1. Potential source of income generation; and
  2. Stock replacement.

Since selling a put places you in an obligatory position of taking ownership of a stock, consider only selling a put if you are comfortable owning the security at the predetermined price, should it indeed be put on you. If the sold put expires without exercise, the seller keeps the entire premium.

“Instead of always having cash on the sidelines, I can pick a price that I am willing to buy the stock and collect some income,” Rahbari said. “Even if I don’t have the opportunity to buy the stock lower, at least I am earning monthly income rather than collecting nothing in cash.”

To hear more on Rahbari’s strategy for selling puts on Alphabet, be sure to check out this TradeTalks interview with Jill Malandrino from the Nasdaq MarketSite.

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