Weekly Strategy Discussion

The Weekly Strategy Discussion is designed to assist individuals in learning how options work and in understanding various options strategies. Options involve risk and are not suitable for all investors. The strategies discussed are for educational and illustrative purposes only, and should not be construed as an endorsement, recommendation or solicitation to buy or sell securities. Commissions, taxes and transaction costs are not included. Please contact a tax advisor for the tax implications involved in these strategies.

Selling Out-of-the-Money Weekly Puts

Example:  XYZ stock is trading at $27.30 

Outlook: You are neutral on XYZ stock and would like to generate weekly income by selling out-of-the money

                options.

Possible Strategy: Sell one weekly 26.50 strike put at $.50

 

At Expiration

  • If the stock is at or above the 26.50 strike price the Put expires and you keep the $.50
  • If the stock is at or below the 26.50 strike price the Put most likely will be assigned and you would have an obligation to buy 100 shares at $26.50/share
  • Your effective stock purchase price would be $26.00

             $26.50 - $.50 Put Premium = $26.00

             Break-even: XYZ at $26.00

             Maximum Loss: Stock ownership below $26.00  

IN SUMMARY: Selling out-of the-money weekly Puts can be a good strategy to generate income.  You must be willing and able to purchase shares at $26.50 should you become assigned on your short Put option.  The risk will be in the potential ownership of the stock.