When to Sell Your Puts
Put options contracts traded on the options exchange derive value from the price of an underlying stock or other security. A put will increase in value if the underlying stock price declines below a certain level. Traders buy puts to profit from falling stock market values. Not taking put profits at the appropriate time can have unintended consequences for a trader.
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Put Contract Features
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A put option contract provides an option trader a price at which the option can be exercised and an expiration date. For example, a WMT 50 April put is a contract which can be exercised to sell 100 shares of Walmart stock at $50 per share up until the April expiration date. The $50 stock price is called the strike price for the option. Expiration dates are the Saturday following the third Friday of the listed expiration month.
Profiting With Put Options
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Put options allow a trader to profit from a declining stock price. When the share price is below the strike price, the value of a put option will increase by $100 for each $1.00 the stock price falls. A trader selects stocks he thinks will decline and buys put options with strike prices above the target price for the price decline before the expiration date. Puts are available with a wide range of strike prices and expiration dates with varying prices. Individual puts are selected based on the trader's price forecast for the underlying stock prices.
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Managing Puts
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After puts are purchased, the trader monitors the underlying strike price to see if the predicted price decline occurs. Many traders use technical analysis tools to predict the direction and magnitude of stock price changes. If the stock is in a trading range or a technical price limit exists, the trader should plan to sell the puts when the target price for the stock is reached. In the example, the trader may plan to sell the puts when WMT reaches $45, providing a profit of $500 per put contract less the amount paid for the option.
Put Option Expiration
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As the expiration date approaches, the trader must closely monitor the stock and put values. If the stock price is below the option strike price, the contract has intrinsic value and is in-the-money -- ITM. At expiration, an ITM contract will be automatically exercised and the trader must have the shares to sell at the put option strike price. In most cases, in-the-money puts should be sold before expiration to lock in the value. Puts with the stock price above the strike price are out-of-the-money -- OTM. Puts that are OTM will expire worthless and the option trader will lose the amount paid to buy the options.
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