Why Every Investor Should Understand Put Selling August 26, 2025
Introduction
Options trading can seem complicated at first, but it offers investors flexible strategies to complement a traditional buy-and-hold portfolio. One popular approach is selling put options, which allows you to collect premium income and potentially buy stocks you like at a discount.
To earn a steady income or acquire shares at a price you’re comfortable with, selling puts is worth understanding.
Understand the Basics: What is a Put Option?
When you sell a put option, you agree to buy a stock at a specific price (known as the strike price) if the buyer decides to exercise the option before it expires. In exchange, you receive a premium (cash) upfront. If the buyer doesn’t exercise the option, you keep this premium as your profit. Typically, one stock option contract represents 100 shares of the underlying stock.
What does it mean to Sell a Put Option?
Selling a put option is like being an insurance company.
The Benefits of Selling Put Options
1) Earn Premium Income
Each time you sell a put, you collect a premium upfront. If the option expires worthless (stock price stays above the strike), you keep this premium as profit.
In the example above, selling a put option with a strike price of US$100 and receiving a US$500 premium means that if, at expiry, the underlying share price is above US$100, the option will typically expire worthless, you keep the full US$500 premium.
2) Buy Stocks at a Discount
If the stock price drops below the strike price, you’ll be assigned the shares. However, you’re buying at the strike price minus the premium collected, which effectively lowers your cost basis.
In the example above, buying the shares at the strike price of US$100 and receiving a US$500 premium lowers your breakeven price to US$95 per share. This means you would still earn US$2.50 per share in profit even if the stock falls to US$97.50. (1 contract = 100 shares)
3) Flexibility in Market Conditions
Selling puts works best when you expect the stock to remain flat or rise slightly. Unlike strategies that rely solely on upward price movement, this approach allows you to generate returns in a broader range of scenarios.
Understanding the Risks of Selling Put Options
1) Below your strike price
If the stock drops sharply, you may have to purchase it at a higher price than the market is offering, leaving you with an unrealised loss.
In the example above, buying the shares at US$100 and receiving a US$500 premium lowers your breakeven price to US$95 per share. However, if the stock price falls to US$90, you would face an unrealised loss of US$5 per share.
2) Potential for Large Losses
Premiums are limited, but downside risk is not. If the stock keeps falling, losses can accumulate in the same way as directly owning the shares.
How to Mitigate the Risk?
Like any strategy, selling puts comes with its risks, but these can be managed effectively.
1) Sell Puts on Stocks You’re Comfortable Owning
Choose stable and reputable companies that you’re willing to own at a lower price. That way, even if you’re assigned, you’ll own a stock you believe can recover over time.
2) Be Mindful of Market Conditions
Selling puts works best in neutral to slightly bullish markets with some uncertainty. Instead of waiting for prices to fall (and possibly missing opportunities), selling puts allows you to stay engaged in the market and earn premiums despite elevated valuations.
3) Generate Passive Income Strategically
If you believe the stock is stable but prefer not to own it outright, you can continue selling puts to collect premiums. Rolling positions further out in time can also help reduce downside impact.
Example Scenario
You like Company ABC, currently trading at US$100, but would prefer to buy it at US$95.
- You sell a put option with a US$100 strike price and receive a US$500 premium for the contract sold.
- Two outcomes:
- Stock stays above US$100: You keep the US$500 premium and the option expires worthless.
- Stock falls below $100: You’re assigned and must buy 100 shares at $100 each. However, after factoring in the $500 premium ($5 discount per share), your breakeven price is $95 per share, giving you a discount compared to the original price.
Conclusion
Selling put options can be a powerful way to generate income and acquire stocks at attractive prices, provided it is applied with discipline and proper risk management.
For investors keen to explore this strategy straightforwardly, POEMS has launched a strategy-friendly Cash-Secured Put feature designed to help investors better understand and incorporate this strategy into their portfolios.
Ready to start? Explore our beginner-friendly options platform today, or if you would like to dive deeper into other strategies, check out our detailed guide on Cash-Secured Puts.
For more information on trading the US markets through POEMS, visit our website or contact our Night Desk representatives at 6531 1225 (available from 2 PM onwards). Don’t wait— register your account today and take the first step towards accessing these exciting markets!
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About the author
Global Markets Desk US Dealing Team
The Global Markets Desk US Dealing team specialise in handling the US Markets in the Global Markets Desk.
Their responsibilities and capabilities extend from managing and taking orders from clients trading in the US market, to content generation, Technical Analysis and providing educational content to POEMS clients.
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