NOTE: This graph shows profit and loss of long stock and the short put.
The Strategy Selling the put obligates you to buy stock at strike price A if the option is assigned. When running this strategy, you may wish to consider selling the put slightly out-of-the-money.
How I Buy Stocks At Huge Discounts with Put Options
The premium received for the put you sell will lower the cost basis on the stock you want to buy. Break-even at Expiration Strike A minus the premium received for the put. The Sweet Spot You want the stock price to be just below strike A at expiration.
Remember, the goal here is to wind up owning the stock. Maximum Potential Profit Potential profit is limited to the premium received from selling the put.
Maximum Potential Loss Potential loss is substantial, but limited to the strike price if the stock goes to zero. Ally Invest Margin Requirement You must have enough cash to cover the cost of purchasing the stock at the strike price. NOTE: The premium a secured put option is from establishing the short put may be applied to the initial margin requirement.
As Time Goes By For this strategy, time decay is your friend. You want the price of the option you sold to approach zero.
That means if you choose to close your position prior to expiration, it will be less expensive to buy it back. Implied Volatility After the strategy is established, you want implied volatility to decrease. That will decrease the price of the option you sold, so if you choose to close your position prior to expiration it will be less expensive to do so. The idea is to hold the stock longer-term, so you need to be comfortable with that.