Yes you did read the title of this post correctly. I sold a Put! I sell Puts so infrequently I didn’t even write my Put pages in “Main Street beats Wall Street” yet. Hopefully I’ll get them done soon. Let’s take a look at why I sold a Put on YELP. First let’s define what a Put sale does. When you sell a Put, you give the Put buyer the right, not the obligation, to sell you stock at the Strike Price entered into the option contract. You the Put seller has the obligation to buy he’s stock at the Strike Price if he wants to sell his stock.
I sold 50 contracts of YELP 8/5/16 $31.50 Put and received a premium of $.50. The total premium on the 50 contracts is $2500. This contracts says I must buy 5000 shares of YELP at $31.50 if the Put buyer wants to sell his shares to me. Let’s take a look why he would want to sell me his stock. If, on Expiration Day, YELP stock is above the Strike Price of $31.50, he will not sell me his stock because he can get more money on the open market. Let’s say on this coming Friday the stock is at $33. Why would he sell me the stock at $31.50 when he can get $33 on the market?
On Friday, let’s say the stock is at $30. He will sell me the stock at $31.50 because on the open market he would only get $30. This is why he paid me a premium. He wanted to have the right to sell me his stock if it took a big drop.
Why did I sell this Put? When the stock was at $32 I was about to put in an order to buy 5000 shares of YELP to cover the Call I sold this morning as part of my Roll Out. I’ve been reading a little on YELP and I think the stock is going to continue moving up. I’m a little nervous about my Naked Call and I wanted to cover it. I decided, instead of just buying the stock when it was at $32, I would sell a put and take a premium to buy the stock. If the stock goes below the $31.50 mark I’ll have the stock delivered to me. It will also be delivered to me even if it drops below $31.50. If this happens, the way I look at it, I was going to buy it at $32 anyway, so if I get it for $31.50 plus the $2500 premium, it’s a good deal. If the stock never gets below $31.50 I’ll never buy the stock, I won’t be covered on my Call, but I keep the $2500 premium. Let’s watch and see what happens. I give this trade a Risk Factor of 1. I don’t see much risk here. Here’s the Put order:
Sell to Open 50 YELP 8/5/16 $31.50 P @ $.50 (+$2500)
Please notice the only difference in this order form from the ones we’re used to is there is a “P” for Put and not a “C” for Call.
If you have any questions on Puts please send me an email.
Steve
The Options Coach