Selling Put Options Explained (In 5 Easy Steps)

Okay, if you heard about the strategy of selling put options and how people are using it to make money in the stock market and you like to give it a try yourself but have no idea how or where to get started and that's keeping you away from the strategy entirely, then this video is for you because in this video I'm going to give you a simple, easy, and safe five-step plan to get you started. All right, so let's just jump right in. All right, everyone. Lee Lowell here from smartoptionseller.com and selling put options is our bread and butter. I mean, it's all that we do and I've been doing it for 35 years now. I've also helped over the last 20 years or so, I've helped thousands of other students learn the strategy and that's what I want to help you do today. But before we get started, I want to make sure that you get our free ebook. It's a 35-page ebook that I wrote all about put selling. It's called Put Selling Basics. It's what put selling's all about. I break it down what it is, how it works, and why we love it so much. So, I want to make sure you get a free copy. Down in the description below, I put a link for the free ebook. Make sure you get it. Oh, and also down in the description, I have a survey that if you wouldn't mind taking, it'd take you less than 2 minutes. I put together a few questions to ask you what your biggest problems are, what your biggest frustrations are with options trading today. And and if you wouldn't mind, down here in the description, I also put a link for the survey. Please take it if you will. Okay, let's get cracking. Okay? So, let's just get started. All right, what you see in front of you is one of our famous cheat sheets, okay? I give you the the cheat sheet here so you can go along with me and we're going to talk about the five-step plan on how to sell put options. So, let's just back up for a quick second and talk about what put selling's all about. In the options market, you have uh buyers and sellers of options and in this case, we're just talking about being the sellers, and we're talking about selling put options, not call option, okay? So, when you do sell a put option, you're accomplishing a couple things. Number one, you're going to get money right up front in your uh trading account from the put option buyer. And and the reason why you're doing is doing that is because you're entering into an agreement to allow the put option buyer to actually sell you some shares of stock sometime in the future at a certain price, and that's called the strike price. So, what you want to do is whenever you sell a put option contract, you're entering into an agreement to potentially buy shares of a stock sometime in the future at a price of your choosing. So, you really are in control. So, don't sell any put options uh for strike prices on stocks that you don't want to buy. So, let's go through the five steps here, and then we're going to look at some examples in the option chain. I'm going to show you some some P&L calculations, some break-even points, and you know, how to use your account, how to get an account, and um you know, a couple of these considerations down here. So, let's just talk about this. Number one, when you sell put options, the very first thing that you have to do is you want to make sure you're bullish on a stock, okay? So, you have to pick a stock that you're bullish on. It could be any stock you want, but you need to know that this is a stock that you know about, that you like. You want to get your hands on some shares of that stock. Don't pick stocks that you know nothing about or that you heard in a chat room. That's the worst thing you can do. You have to stick with stocks that you know that you know something about, and you want to buy shares of that stock. If you know nothing about how to pick stocks, if you don't know what stocks to pick, what I'll also do is put a link down in the description to an option scanner that can be great to help you out with that. And at the end of this video, I'll put another video on the screen of of a video I did very recently about how to use scanners to pick potential stocks, okay? So, So, number one, we've decided, okay, you have a stock that you're interested in. Number two, right here, follow my mouse. That now that you know what stock you're going to choose, you have to pick a level that you would be interested in comfortable potentially buying shares of that stock. So, you've got the stock, now you just need to figure out where would you want to buy shares of that stock, okay? We're going to go through the option chain, I'm going to show you how to do it, we'll look at the stock charts as well. Number three, once you pick the stock, once you pick the level that you'd be interested in in buying shares of that stock, then you have to actually manually go into the option chain, which you get through your broker, and look at the option prices to see how much money you could collect from the put option buyer. Now, options have all different expiration dates. Zero days to expiration, one day to expiration, one week to expiration, one month, three months, six months, two and a half years out in time, and I'll show you this as well. The longer out in time you go, the more money you will get because you're actually giving the stock more of a chance to move around. But, that's not necessarily a bad thing, and I'll show you the numbers of how that works. So, once you've got the stock, the level that you want to potentially buy that stock for, you check the option chain. Once you figured out the expiration and that strike that you want to sell, then step number four, you actually sell that put option in your broker platform, and you collect the cash. Okay, once that goes through, and right here it's called sell to open. A lot of people don't understand how how the actual mechanics work. It's called a sell to open order, you're selling the option to open the transaction. So, you sell that put option, you collect your cash. Now, you're just The next thing you really need to do is just wait to see where the stock fluctuates by the expiration date. Now, it's either going to um expire worthless, it can expire worthless, you can get assigned, we're going to talk all about this. But, two things you need to know. The stock can either finish above or below your strike price at expiration, and that's going to determine whether the option expires worthless or that you actually get to buy the shares of the stock. Now, when you sell a put option, it's not guaranteed that you will get to buy shares of the stock. What is guaranteed though is that you will collect the money from the put option buyer up front. So, you're gaining this current income up front. The rest of the trade is whether the stock's going to finish above or below that strike price, which is the level in which you want to buy shares of that stock. Now, if the stock finishes above the strike price, you don't get to buy shares of the stock, but you keep the income that you received on day one. If the stock finishes below the strike price, then you will be required to fulfill your end of the agreement and buy 100 shares of that stock at the strike price, and you will have to pay for those shares at that time. Okay. So, step number five here, you wait until expiration to see what happens to see if you get assigned, or or you could always buy that put option back before expiration. You can buy it anytime you want. You can get out of the trade anytime you want, and it's called a buy to close order. Okay. So, we're going to jump into the option chain. I'm going to show you some examples and just some considerations down here. There's a few things you need to know before you sell a put option. Number one, um you have to get approved by your broker in order to sell put options, and that's either going to be a cash secured account or a margin account right here where my mouse is. Okay, and there's two other things. There's two ways you can play selling put options. Number one, many people sell put options just to collect the cash, the upfront income, and they have no um wanting of ever to buy shares of that stock. And then the the second category of put sellers is that people that actually do want to buy shares of the stock. So, they'll pick the strike price accordingly to give them more of a chance to actually get the shares of that stock. So, it's going to depend on which camp you fall in. Are you just there to collect the income or you there to potentially get the shares as well cuz that's something that we need to talk about. And we'll talk about the P&L calculations, how much money you can get uh i- i- you know what the the returns you can receive um the money that you have to put up to make the trade. Now, I want to make sure that everyone understands and I always get comments in these uh after these videos, people saying, "Oh, that's like such a horrible return. You're you're not getting any money, you know, any bank for your buck." And we're going to talk about that when we talk about the P&L calculations. And also again down here, you can always close the trade anytime you wish. All right, so let's just jump into the option chain here and talk about what it is all about when you sell put options. Now, again, and I say this every time I make these videos, the trades that I'm showing you here are purely for educational and informational purposes only. These are not any recommend- mendation recommendations of any sort. I'm not telling you to sell put options on the stocks that I'm showing you here. These are just examples only. But every time I keep getting comments in this on these videos saying, "Why are you recommending that stock? Look at the stock's going down in price. Why Why do you Why would you tell people to sell put options on these stocks?" I'm not telling you to sell put options on these examples, okay? Just want to make sure everybody understands it. All right, so now we're in the option chain. Call options on the left, put options on the right. If you've never seen an option chain before, this is what a typical option chain looks like. Strike price down the middle. This is one of you will have to choose one of these strike prices uh as your level that you potentially want to buy the shares for. And the only thing else you really need to look at is the bid and ask columns here to tell you how much money you can potentially receive. Now, the first stock we're going to talk about is Apple. Let's just say you love Apple, you're bullish on Apple, you want to potentially buy some shares, but you don't want to buy the shares at its current price. You want to buy the shares somewhere lower than where it currently trades right now. So, let's just jump into the charts here and take a quick look at Apple for example, okay? So, here's the price action of Apple. Uh had earnings come out very recently. It closed just under $309 a share. So, you're thinking, okay, I want to buy some shares of Apple. I don't want to buy it at its current price. I want to buy it somewhere cheaper down here. I want to get a bargain. So, you're thinking, you're looking at the charts and you're going back here. You're you're seeing, you know, roughly $250 is the last low level here. We can even draw this on the chart. We can draw kind of like a support area, which is here. All right. Now, that coincides roughly somewhere around 245, $250 a share. So, you're thinking, okay, I love Apple. I have, you know, an iPhone, an iMac, an iPad. I I like the company. I want to potentially buy some shares. And $250 is a good place for me to potentially buy shares. It's at 308 now. Give myself a nice haircut here. Trying to buy it at $245, $250. If that's the area that you're comfortable with, then the next thing you do is you go into the option chain and you start looking at expiration dates for Apple. Now, in this is in this option uh in this broker platform, uh last day today was July 31st, 2026. That was the most recent expiration date and they go all the way out to December 15th, 2028. Almost 2 and 1/2 years into the future. But, what we're going to do is we're going to concentrate on, you know, most traders are in the shorter term time frame. So, we're going to look at this October expiration as our first example, example only. Expires in 77 days. And you had We looked We're looking at the 245 to 250 strikes. So, let's just concentrate on these 245 puts right here. Here's the strike, 245. Scroll over. This is how it went out um trading today on July 31st, 2026. A $1.05 bid at a $1.19 offer. So, that's the bid and ask prices. That's Every option price Every option contract, I should say, has a price. It has a bid price and an ask price, just like stocks do. So, you always want to try to make your trade somewhere in between the bid and ask price. So, let's just assume we can sell this thing for uh $1.12 per contract, right smack in the middle. So, what you would do is in your broker platform, and I'll show you how you do this, you click on the bid price, and we're going to put in $1.12 here. Okay, so what you're going to try to do is sell this thing for $1.12, and you can um transmit. This is going to bring up another window here. And what this window is telling you what what's about to happen before you actually actually place the trade. You're going to sell sell one contract of the Apple October 245 put, and you're going to try to get $1.12 per contract. Okay? Now, couple things I want to show you here. If you were trading in a cash security account, that's one of the types of accounts you can have is called a cash security account, meaning whatever strike price you choose, you have to have the money up front in your account at all times as if you were actually buying the shares at that strike price. So, if you're trying to potentially buy 100 shares at $245 per share, that's going to be a $24,500 cash requirement you will have to have in your account free and clear before you even execute this trade. So your broker is going to make sure that you have 24 and a half thousand dollars in your account before you even press the execute button on this trade. So if you have a mar if you're trading in a margin account, now this is what I want to show you here down in this area right here. If you're trading it with a margin account, you're only going to have to have a fraction of that 24 and a half thousand dollars. In this case that it's called initial margin would be four just over $4,400 that you would need to have in your account as free cash before you execute the trade. $4,400. So you can see that having a margin account, you're going to need a lot less money up front in order to make the trade. Now a lot of people can't get approved for margin accounts, so they'll have to sell these puts as cash secured. So you'll need the 24 and a half thousand dollars. So I just want to make sure everybody understands how that works. Now we're not going to place this trade, so we we cancel out of it. So that's how you do it. If you want to sell a put option on Apple for the 245 strike, you click on the bid, you put in the price that you want, and then you make the trade. And if the trade goes through, now you will collect $112 in your account right up front for your future obligation to potentially buy 100 shares of Apple at $245 a share. Well, it's currently at $308 a share. However, it wherever it closed that day. Now, the only thing you need to know you need to do at this point is wait to see where Apple finishes between now and the October expiration. If Apple doesn't fall below $245, you don't get to buy the shares, you just keep your $112. If Apple does fall below $245, then you get to buy the shares and you're a happy camper. And you get to keep the $112 at the same time. Okay? Now, I want to show you as I said, the longer out in time you go, the more money you will get. So, if we look at the December 15th, 2028, which is 868 days from now, those same 245 puts, they don't have those listed, but you can look at the 240 puts if you want. $15 bid, $18.60 offer. So, you can do that thing for maybe, let's just say $16.50 per contract. That's $1,650 you would get. $1,650 for the same $24,000 obligation, the $24,000 now, you would collect roughly $1,650. So, you're actually getting more money on that same $24,000 cash hold. Okay? Now, if we if we were going to go to, let's say, a week out in time, to, let's say, August 7th, which is 7 days from now, the 245 puts are going to be worth a lot less. Now, it's not even you probably can't even sell it for maybe a penny to get $1 in your pocket. Okay? So, the shorter the time frame, the less money you get, which means you'd have to go up further in strike prices to get any kind of money, which puts your potential purchase of those shares much higher or much closer to the current price of the stock. So, it all comes down to, you know, what's your comfortable level of a stock that you want to buy versus how much you want to receive versus how much time are you willing to give the trade. It's completely up to you. You have to figure that out what you want to do. Okay? Now, some people might not have $24,000 to buy 100 shares of stock. That's fine. It all depends on, you know, the price of the stock that you're trading with. Now, we can look at a stock like SoFi, which is right now $16 and change. If we go to the chart here, what we can bring up SoFi. And SoFi's trading uh $16.30. What you can do is you can look at the the recent support area here. Now, we'll draw a line as well. And this is part of your charting, okay? You need to look at the charts to see, you know, some of the support areas. Now, you can see going all the way back to about April of 2025, first $15 was a resistance area, broke through that, and now it's come back down 1 2 3 times. It has not been able to break through the $15 level. So, if you're gung-ho on SoFi and you think that you potentially want to buy some shares at $15 because that's a support area, then you go back to the option chain. And let's pull up We got SoFi pulled up here. So, we're looking at the same October expiration. You look at the 15 strike. So, you can get roughly $92 $92 in your pocket. That's $92 per contract. You got to multiply this by 100 cuz there's 100 shares in every option contract. So, you get $92 in your pocket for your obligation to potentially buy 100 shares at $15 a share. Now, in this case, that would only be a $1,500 cash on hold if you're doing cash secure. $1,500 a $92 uh payment uh divided into $1,500 is probably a much better return on your money versus the Apple trade where you're getting, you know, a couple hundred dollars divided into $24,000. But, I want to make sure everyone understands this. That's not the only reason That's not the only way to think about the returns. I'll talk about that in a second. But, if you were to sell this thing, let's let's make a new line here. I just want to see what the the margin requirement would be. So, you know, if you had cash secured, you have to hold aside uh $1,500. For the margin, I'll click on transmit. Uh it's only $432. Now, even if you're trading on a margin account, it's $432. If you are assigned, meaning that's you get put the shares of SoFi falls below 15, you got to buy the shares. So, if your initial margin requirement was $400, you got to come up with the balance of the 900 uh the the $1,100 to pay out that full $1,500. So, using a margin account, you have less money up front, but if you do have to buy the shares, you have to come up with the balance. If you're using a cash secured account, you'll always have that $1,500 or the $24,000 on on hold at all times. So, there's different things to to think about here. You know, it's the price of the stock, the price of the you know, the strike price that you choose, how much money you have to put up. And let's talk about the returns for a second. Uh before we talk about the returns, let's talk about the the break-evens for a second. If you were to sell this 15 put for 90 92 cents per contract, your cost basis your real cost basis would be $14.08 per share. You take the 15 strike price, you subtract out the cost of the option. That gives you your real your real potential cost basis. So, even after if you had to buy the shares at $15, your real cost basis is $14 and uh 8 cents per share. So, you could still come out ahead. Now, you you own the shares. If you get assigned, you own the shares. Now, you can hold on to those shares forever. So, let's talk about the returns here for a second. Some people will think and I got the calculator here. Some people only look at put selling and this is part of the comments that I get. Some people will only look at put selling on the money that you received versus how much money you have to put aside. And in this case, let's say you're using cash secured. So, you're going to get $92 divided by $1,500. That's a 6% return in 77 days. If you annualize that, it's going to be a lot higher. Now, if you're using a margin account and, you know, you're taking that initial margin of $400, so you get $92 / I think it was $432 or something like that. Now, that's like that's over a 21% return on your ca- your initial cash on hold for 77 days, the annualized return is going to be a much higher. Now, if we're looking at the the Apple trade, let's go back to Apple here for a second. You're looking at these um October 245 puts, and you were going to get $112. So, $112 / 24 and 1/2 thousand dollars on hold, it's a very It's less than 1% return on the the full cash secured. If you're using a margin account, the margin was like $4,400, I think, something like that. So, 112 / 4,400, let's just round that. It's about a 2 and 1/2% return. Okay? So, the higher the strike price, the higher cost of the stock, you're going to have to put up a lot more money. And so, that could be a consideration. Now, I want to make sure that, you know, people will come to here and say, "Why would I only want to get a 1% return on my money?" You have to look at put selling as more than just the return on the money that you receive. You're You're selling a put option because you're giving yourself an opportunity to potentially buy shares of that stock at a much cheaper price than where it is now. You really can't put a price on that, okay? If you just bought 100 shares of a stock at its current price, and the stock goes down, you're already have a negative return. You're not getting anything for that uh money that you just put up to buy those 100 shares. But, when you sell a put option, you are guaranteed money on the trade. You're guaranteed to collect that premium income right up front. So, at least you're getting something, but you're also giving yourself an opportunity to be assigned those shares, buy those shares, and now your your potential future returns are unlimited. So, don't only look at puts on as what is my return on the income received. There it's more than that. You're giving yourself the opportunity to potentially buy those shares. It's the same thing with if you're just buying 100 shares of stock. The stock could go down on you right off the bat and you're going to make and you're making negative returns. Don't look at selling put options any different. Okay? You're You're You're giving yourself the opportunity to buy the shares. And yes, you are getting a return on the money that you had to put up on the income received. Okay? So, just I want to make sure everybody understands that. Now, um what else do we want to talk about? Let's go back to the cheat sheet here for a second. >> [snorts] >> Um here's the considerations. So, number one, you have to be approved by your broker to sell either Turn that off. Um to sell cash secured or margin. Takes a higher level of approval to get approved for a margin account. Um most people can get approved to sell cash secured because there's no risk to the broker. You're already putting up all the money ahead of time, okay? As I said, income versus wanting the stocks. Are you selling the put option just to get the income or because you actually want to buy shares of the stock? And that will determine which strike price you choose. You know, if you just want to collect the income, you want to make sure you use those lower strike prices. Okay, let's go back to the to the Apple chain here for a second. If we look at Apple in October, uh you can go all the way down to um you know, you could look at the 215 put and you can get 30-something dollars in your pocket. You know, $215, that's a long way. Let's look at Apple here. Let's bring Apple back up. $215 is all the way down here. It's a big drop from where where is now. SoFi, on the other hand, um you know, maybe you want to sell the $10 puts somewhere in the future. Let's look at SoFi real quick. Those $10 puts for October aren't paying all that much, but if you go all the way out to December 2028, uh for the $10 puts, you can get, you know, over 200 bucks in your pocket. So, you have to figure out which expiration date would work for you. Okay. And as I said, >> [clears throat] >> you do not have to hold on to the trade all the way to expiration. If If you sell put options on Apple and Apple keeps dropping and you're like, you know what? I really don't think I want to buy Apple anymore. What can you do? Well, you can buy the option back. Buy that put option back and that'll completely close out the trade. Here it says buy to close. Now, you may lock in a loss at that point because if stock goes down, put option values go up. So, if you sold that put option for $400, you may have to buy it back for $500 or $600, wherever the stock is trading at that time. So, you won't know that until you actually buy it back. But, you can always get out of the trade. All right. That's it for selling put options. There's your five steps right here. You can take a picture of this. You can screen capture this, whatever. Make sure you get the the free ebook link down below. Also, I want to make sure everybody does this. I I'm running a survey here. I'm going to put a link down in the sur- for the survey below. If you have any questions on options trading, if if options trading is troubling you right now, I want to know what the problem is. I made this survey. Click the link below about Take the survey and I'll see what your problems are. I'm always making future products and and and if we get enough uh responses on certain uh problem that everyone's having, I'll make a product for that as well. So, take the survey, get the free ebook down below. Leave me a comment, give me a like. Coming up on the screen here is the video on how to potentially pick stocks to sell put options on. All right. That's it for me today. This is Lil. I'll see you in the next one.