selling an option

[zeeck]

beginning trader (read a lot of books but haven't traded much) has a question.

do I need to OWN the stock in order to sell a PUT on it? if I don't, isn't that the almost the same as short selling the stock?

thanks

wasatchm

 

[apau]

Hi Zeeck,

You do not need to own the stock to sell Puts, you are assuming an obligation to buy the underlying stock, so only sell a put if you are comfortable owning the stock at the predetermined price, should it indeed be put upon you.

Shorting a put you want the stock to go up and it carries a positive delta, so would not be the same as shorting the stock.

 

[Warren534]

beginning trader (read a lot of books but haven't traded much) has a question.

do I need to OWN the stock in order to sell a PUT on it? if I don't, isn't that the almost the same as short selling the stock?

thanks

wasatchm

Selling a put is a bullish position. No, you certainly don't need to own the stock.

A short put is identical to a covered call, where you buy stock and sell a call.

 

[options-george]

Yes, all above answers are correct.
You don't need to actually hold the underlying stock.

However selling puts without owning the stock is a risky proposition, as in theory could lose a large amount of money (relative to what you received for selling the initial put) on a losing on the trade, in the situation that the stock declines heavily.

For this reason brokers generally do not allow you to sell "naked puts" (or naked calls). "Naked" means un-hedged, meaning you have no position in the underlying.

An alternative would be to sell a bull put spread - also a bullish trade.
In this scenario you might sell the $30 put but buy the $25 put - thus your maximum loss is $5 (less what you have collected in originally opening the two-legged position). A broker will more likely allow you to do that.

 

[apau]

Hi Options-george, great blog by the way. Where do you trade?

I sell naked puts with my broker, but then I have the funds to cover the purchase in the account.

Options-George is right, it can be risky especially for a newbie.

 

[SunnySideUp]

do I need to OWN the stock in order to sell a PUT on it? if I don't, isn't that the almost the same as short selling the stock?

No. In case of selling a call being long in the underlying would be good (otherwise the risk would be unlimited) but not necessary. When the Call gets assigned you sell the stock you already own, if not then you would be short the underlying after assignment.

But selling a put owning a stock is without interest. Equivalent here would be being short with the underlying (not long as you asked). Usually brokers let you do sell puts as cash secured puts to cover potential costs in case the put gets assigned. This cash is not necessary when you are short the underlying because then your short put is covered. Getting assigned this short position in the underlying would be neutralized.

The common way is paying some margin for the short put or having the money needed in case of assignmnt in the account.