Sell Puts the Smart Way: Get Out Before Expiration Nears

Selling put options can be a great way to help increase the value of your portfolio without taking on too much risk. At its core, a put sale allows investors to get paid to potentially buy shares of a company they like at a price they like.

But what if you have no interest in being put shares? What if you wish to just collect income?

Fortunately, there’s good news. With a few simple strategies, any investor can significantly reduce the risk of being put shares.

That will allow you to take advantage of the power of selling put options to generate portfolio income without having to buy large blocks of stock.

Remember, selling any option is really about selling the time premium. The closer to expiration, the less time premium there is. Typically, time premium starts to decline at the fastest rate (known as “theta decay”) about 90 days out.

So for a put seller, the first strategy is to sell an option long enough out to get a reasonable time premium. Anything longer than a few months may take too long to play out.

Shorter trades offer little time premium relative to the risk. The less time you’re in the market, the less chance something can go wrong and you end up owning a stock.

Booking profits

There’s a simple way to avoid being assigned shares: Get out of the trade and book profits well before expiration.

If you sell a put option three months before it expires, you may want to close out with a month left. If the underlying shares go up, or at least don’t go down, the option will lose most of its value by then.

An option sold for $5 that drops to $1 has already made 80 percent of the expected return. There may be better alternative trades at that point rather than keeping money in the trade trying to squeeze out the last dollar.

Before trading costs were dropped to zero last year, a few online brokerage accounts provided free trades on options with a miniscule amount remaining.

The other advantage of this strategy? You’re not sitting around waiting for an option to expire only to have the underlying stock dive.

All too many put sellers have had this happen, so leaving some money on the table isn’t the worst idea.

Treat it like a business

Besides those technical factors, there’s an important psychological one as well. It’s essential to treat put selling like a business. Investors looking to acquire shares can select companies that they wouldn’t mind owning for a significant period of time.

A pure put seller, however, needs to look objectively at each trade and know when to take the risk off the table. Those looking to just profit from just the put sale trade need to find stocks with high premiums, which usually occurs from a recent selloff.

Also, shares need to rebound, or at least stop falling, for the best results.

Now, as with any investment strategy or business, it’s best not to get greedy in the short-term. Used safely, this strategy will create 1% to 2% gains each month with a low risk of being assigned shares.

Reaching for a higher return greatly increases the chances of owning shares.

Yes, it may not sound like much, but it works out to 12% to 24% per year. That’s far better than the stock market’s average annual performance of 7% after inflation.

Recommended Articles

See the World: How to Fund a Nomadic Retirement

According to the 18th Annual Transamerica Retirement Survey, 70% of American workers dream of a retirement spent travelling the world, visiting exotic locations and enjoying the diverse cultures of the

3 Tax-Friendly States for Retirement

When it is retirement planning time, there are many factors you will need to consider. In addition to weather, proximity to family, and health care access, the amount of income

9 Signs You’re In a Relationship With a Narcissist

Narcissism is a very widespread issue today in our society. Most of us have heard the term "narcissistic" thrown around in conversations from time to time. This term is often

Iaccino: Watch Biden Treasury Pick Yellen for Hints On Stock, Bond Markets

As the Biden administration gets to work, watch for a tussle over exactly how the new leadership in Washington will pay for the spending Democrats feel is necessary to save

As Clock Ticks in Congress, Union Retirees Face Pension Cuts of 90%

Unless Congress acts, some 10 million union retirees could see their pensions cut by 90%. Many private pensions ultimately are backed by the taxpayer, much like big government-backed home lenders

Are Your Yoga Pants Making You Sick? What You Need To Know

Many women nowadays are wearing yoga pants on a regular basis. Not only are they extremely comfy, but they compliment body shape as well. Multiple stores are well known for

4 Proven Ways to Build Passive Income

Digitization of the U.S. economy has accelerated beyond all estimates and the trend is only likely to intensify going forward. While traditional physical ways to build a passive income still

8 Unconventional and Fun Ways to Make Extra Money

The number one formula for making money is that there is no formula. In fact, if you are willing to move away from the traditional path to earn money you

Science Says the Perfect Female Body Should Look Like This

Everyone has their own opinion of what the female body should look like. Society and the media often exhibit women that are thin as the ideal womanly figure. This causes

Americans Are More Afraid of Doctor Bills Than They Are of Being Sick

The skyrocketing cost of healthcare has become prohibitive for many Americans. More people seem to be skipping physician visits, and U.S. healthcare costs rose to $10,000 a year per person in

Your Meat Is Treated with Carbon Monoxide to Make It Look Fresh

When you are looking for a nice steak, pork chops or chicken at your grocery store one of the main things you look for is the color of the meat.

Anxiety? 10 Foods You Should Be Eating (and What To Avoid!)

Occasional anxiety is a part of life. You may feel anxious when faced with a problem at work, before making a big change, or deciding on an important decision. But anxiety disorders