Are you tired of waiting for the perfect moment to buy your favourite stocks at a lower price? Or maybe you’re seeking smarter ways to reduce your entry cost? Enter put options — a strategy that allows you to earn income while you wait. Though put options might seem complicated initially, once you grasp their basics, they can become a valuable addition to your investing toolkit.
Understanding put options
A put option is a financial contract that gives the holder the option, but not the obligation, to sell a stock at a specified price (the strike price) by a specific date (the expiration date). While this might sound complex, let’s break it down into simpler terms.
The main benefit of put options is that they allow investors to profit from falling stock prices or protect their existing investments. For example: Imagine you buy a put option with a strike price of $50 that expires next month. This means you (now the option holder) have the right to sell the stock at $50 any time before or on the expiration date. If the stock’s market price falls below $50, you can still sell it for $50. It’s like having insurance for your stock — you’re locking in a selling price by purchasing the put option, even if the stock’s market value drops below that price.
How to use put options for income
One of the key features of options is that they allow investors to be either buyers or sellers of the options. As a put option seller (option writer), you earn premiums from the options you sell, regardless of whether the option is exercised.
Let’s say you identify a fundamentally strong stock that you believe is slightly overpriced but would make a great addition to your portfolio if purchased at
