The First Rule of Selling Puts

The first rule of selling puts is, you don’t talk about selling puts. 

I kid, I kid. 

The first rule of selling puts is that you only sell a put if you are willing to own shares of the underlying stock.

That is because, when you sell a put, there is always the possibility that you could be assigned 100 shares of the stock for every put you sold. 

Typically, you will only be assigned if the stock’s price is below your put’s strike price at the time the option expires. However, technically, the option buyer has the right to assign you shares at any point after you execute the trade.

For this reason, I only recommend selling puts that are 100% cash secured rather than selling puts on margin. (With a cash-secured put, you have all the cash needed in your account to cover your obligation if you are assigned.)

It is also why I only sell puts on fundamentally sound companies I would have no problem owning for the long term. 

Last week’s winning Options Income Blueprint trade on Starbucks (SBUX) is a great example of this. Even though the stock’s chart is ugly – like much of the rest of the market after six straight weeks of decline – the company is not just solid but a market dominator. 

Therefore, if the trade had moved against us and we had been assigned shares, I would have been perfectly comfortable holding SBUX for an extended period of time and generating income by selling calls against our shares.

In the case of last week’s trade, though, the stock popped a few days after we sold the put and we made an early exit, generating a 57% annualized return.