Selling Put Option Example on Charles Schwab

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Selling (also called writing) a put option allows an investor to potentially own the underlying security at a future date and at a much more favorable price. In other words, the sale of put options allows market players to gain bullish exposure, with the added benefit of potentially owning the underlying security at a future date and at a price below the current market price.

Call Options vs. Put Options
A quick primer on options may be helpful in understanding how writing (selling) puts can benefit your investment strategy, so let's examine a typical trading scenario, as well as some potential risks and rewards.

An equity option is a derivative instrument that acquires its value from the underlying security. Buying a call option gives the holder the right to own the security at a predetermined price, known as the option exercise price.

Conversely, buying a put option gives the owner the right to sell the underlying security at the option exercise price. Thus, buying a call option is a bullish bet–the owner makes money when the security goes up. On the other hand, a put option is a bearish bet–the owner makes money when the security goes down.

Selling a call or put option flips over this directional logic. More importantly, the writer takes on an obligation to the counterparty when selling an option; the sale carries a commitment to honor the position if the buyer of the option decides to exercise their right to own the security outright.

Here's a summary breakdown of buying vs. selling options:

Buying a call: You have the right to buy a security at a predetermined price.
Selling a call: You have an obligation to deliver the security at a predetermined price to the option buyer if they exercise the option.
Buying a put: You have the right to sell a security at a predetermined price.
Selling a put: You have an obligation to buy the security at a predetermined price from the option buyer if they exercise the option.

Best Practices for Selling Put Options
Investors should only sell put options if they're comfortable owning the underlying security at the predetermined price because you're assuming an obligation to buy if the counterparty chooses to exercise the option.

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#CharlesSchwab #TradingOptions #SellingPuts
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DISCLAIMER:
This video is for entertainment purposes only. I am not in any way acting as an agent or representative of the Department of Defense or United States Federal Government when presenting this information. I am not a legal or financial expert or have any authority to give legal or financial advice. While all the information in this video is believed to be accurate at the time of its recording, realize this channel and its author makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in this video.

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