Selling put options is one of the most powerful income strategies available to traders. When done correctly, it allows you to generate consistent returns while potentially acquiring stocks at a discount. This comprehensive guide will teach you how to sell puts profitably and manage the associated risks.
What is Selling Puts?
When you sell a put option, you agree to buy 100 shares of a stock at a specific price (the strike price) by a certain date (expiration). In exchange for this obligation, you receive a premium upfront.
The put seller's advantage: You profit when the stock stays above your strike price, moves up, or even drops slightly. Time decay works in your favor every day. You only lose if the stock drops significantly below your strike.
Cash-Secured vs Naked Puts
Cash-Secured Puts
A cash-secured put means you have enough cash in your account to buy the shares if assigned. This is the safest approach for beginners.
- Capital required: Strike price x 100
- Risk: Limited to stock going to zero
- Suitable for: Most traders
Naked Puts (Margin)
Naked puts use margin instead of full cash backing. This increases leverage but also risk.
- Capital required: 20-25% of position value (varies by broker)
- Risk: Same as cash-secured but with leverage
- Suitable for: Experienced traders with margin accounts
How to Sell Puts: Step by Step
Example: Selling a Put on MSFT
MSFT is trading at $420. You want to generate income and would buy at $390.
- Sell the $390 put (30 DTE) for $3.50
- Cash secured: $39,000 required
- Premium received: $350
- Return on capital: 0.9% in 30 days (10.8% annualized)
Outcome scenarios:
- MSFT stays above $390: Keep $350 premium (100% profit)
- MSFT drops to $385: Assigned at $390, effective cost $386.50
- MSFT drops to $370: Assigned at $390, paper loss of $16.50/share
Strike Selection Strategies
Choosing the right strike price is crucial for put selling success.
Delta-Based Selection
- 10-15 delta: Very conservative, 85-90% probability of profit
- 20-25 delta: Balanced approach, 75-80% probability
- 30-35 delta: Aggressive, higher premium but more assignments
Technical Analysis
- Sell puts below major support levels
- Use the 200-day moving average as a reference
- Look for previous price lows as strike targets
Percentage Below Current Price
- 5-7% below: Conservative, works for stable stocks
- 8-12% below: Moderate cushion, good balance
- 15%+ below: Very safe but lower premium
Timing Your Put Sales
Best Market Conditions
- After pullbacks: Sell puts when IV spikes during dips
- High IV environment: More premium for the same risk
- Established uptrends: The stock trend supports your bullish position
Days to Expiration
- 30-45 DTE: Optimal theta decay, time to manage
- Weekly (7 DTE): Faster turnover but less time to adjust
- 60+ DTE: More premium but slower decay
When to Avoid Selling Puts
- Immediately before earnings announcements
- During extreme market volatility (VIX above 35)
- When the stock is in a clear downtrend
- Before major Fed announcements or economic data
Managing Put Positions
Profit Taking
Do not wait for expiration to take profits:
- 50% rule: Close when you have captured 50% of premium
- 21 DTE rule: Close around 21 days out, open new position
- Time-based: Close at 50% profit or 21 DTE, whichever first
Managing Losing Positions
- Roll down and out: Move to lower strike and later expiration
- Accept assignment: If you want to own the stock, let it happen
- Close for a loss: Cut losses if thesis is broken
Example: Rolling a Put
You sold the MSFT $390 put for $3.50. MSFT drops to $392 with 10 days left.
- The $390 put is now worth $6.00
- Buy back $390 put for $6.00 (loss of $2.50)
- Sell $385 put (next month) for $5.50
- Net credit on roll: -$0.50
- New breakeven: $384.50 instead of $386.50
Position Sizing for Put Selling
Proper position sizing is essential for long-term success:
Conservative sizing: Never commit more than 20-25% of your account to any single put position. If you have a $100,000 account, your largest cash-secured put should be on a stock with strike around $200-250.
- Start with 5-10% of account per position
- Scale up to 15-20% as you gain experience
- Diversify across 4-6 different underlyings
- Keep 20-30% cash for opportunities and adjustments
Best Stocks for Selling Puts
Characteristics of Good Put Selling Candidates
- Quality companies: Strong balance sheets, consistent earnings
- Liquid options: Tight bid-ask spreads
- Moderate IV: 25-50% implied volatility
- Stocks you would own: Never sell puts on something you would not hold
Popular Choices
- Mega-cap tech: AAPL, MSFT, GOOGL, AMZN
- Semiconductors: AMD, NVDA, INTC
- Index ETFs: SPY, QQQ, IWM
- Financials: JPM, BAC, GS
Advanced Put Selling Strategies
Put Spreads for Less Capital
If you do not have enough capital for cash-secured puts, sell put spreads instead:
- Sell a put and buy a lower strike put for protection
- Reduces capital requirement significantly
- Limits maximum loss but also reduces premium
Scaling In
- Sell puts at different strikes as the stock drops
- Average into a position over time
- Collect more premium on the way down
Combining with Stock Ownership
- Sell puts on stocks you already own to add to position
- Creates a pseudo-synthetic covered call
- Works well in established portfolios
Put Selling Performance Expectations
What can you realistically expect from put selling?
- Win rate: 70-85% of puts expire worthless with proper selection
- Monthly return: 1-3% on capital deployed
- Annual return: 10-25% depending on strategy aggressiveness
Track Your Put Selling Results
Pro Trader Dashboard automatically tracks all your put selling trades. See your win rate, average premium collected, and identify which stocks perform best for your strategy.
Common Put Selling Mistakes
- Selling puts on bad stocks: High premium often means high risk
- Ignoring the trend: Selling puts on stocks in downtrends
- Over-concentrating: Putting all capital in one position
- No exit plan: Not knowing when to roll or close
- Selling before earnings: IV crush goes against you
Summary
Selling puts is a powerful income strategy that lets you get paid while waiting to buy stocks at lower prices. Focus on quality companies, use proper position sizing, and have a clear management plan. Start with cash-secured puts on stocks you would be happy to own, and gradually expand as you gain experience.
Ready to learn more? Explore selling calls for income or discover the complete wheel strategy.