I use a method I have confidence in that is very good at determining when a trend is weakening and about to reverse down. I sold a stock short at about $500 and it is down significantly today. So I sold a put at $497 for about $3 initially. After it went down today I closed this put and sold another one for $5. I want to keep selling these until I think the stock is going to reverse back up. Other than randomly selling puts every time the stock goes down a few days, is there a better way of doing this?
How can I profit from selling puts in a stock I shorted?
- Thread starter spinn
- Start date
yea lol. OPs question is odd...short the underlying expecting price to drop with trend reversal...and selling puts maybe as a hedge? idk
Selling options (naked) is always highly risky.
It's a common practice to sell options (puts) in a perceived "up-market" believing prices will only go higher and the puts' strikes will never be reached... so the seller can keep all of the premium. That's all fine and good until the market/issue drops sharply enough that it traps all the sellers with large and sometimes VERY LARGE losses.
For the most part, selling naked options is like trying to pick up dimes in front of a steam roller.
If you've shorted a stock, then wrote a put against it... your profit potential is the difference between your sale price and the strike if the stock goes down. Not much profit potential. Loss potential, however, is unlimited... offset by the premium you collected for the put your wrote (which expires at zero) if the stock goes higher.
It's a common practice to sell options (puts) in a perceived "up-market" believing prices will only go higher and the puts' strikes will never be reached... so the seller can keep all of the premium. That's all fine and good until the market/issue drops sharply enough that it traps all the sellers with large and sometimes VERY LARGE losses.
For the most part, selling naked options is like trying to pick up dimes in front of a steam roller.
If you've shorted a stock, then wrote a put against it... your profit potential is the difference between your sale price and the strike if the stock goes down. Not much profit potential. Loss potential, however, is unlimited... offset by the premium you collected for the put your wrote (which expires at zero) if the stock goes higher.
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Yes, seems an odd question. You (1) short stock expecting it to go down, then (2) sell a put that insulates you from further (beyond the strike) downside??
Yea exactly maybe he is wanting to collect some premium in case the trade goes against him? Idk man
Well, yes... would offset to a small degree if the trade goes against him. The put premium collected likely small/very small compared to the loss on the stock if it races higher.
Interesting responses lol. I sold the put getting enough premium to allow me to place a stop far enough above the market so even if I am stopped out, I will not lose money because I already have the premium. If I knew it was going to go down, I would not have to do this. Seems like most of you are long today and are a little cranky. I'm sorry, you will be ok.
"Is there a better way to do this"
Perhaps reducing position size to allow a more loose stop placement?