Selling Weekly Put Options for Income [Guide With Examples]

Last Updated: January 29, 2022

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When most people think of income investing, the first products that come to mind are exchange traded funds, stocks, treasury bonds or real estate investment trusts (REITs). Selling weekly put options for income can offer benefits for a portfolio. The first thing you need to know about options is how they generate income and how to benefit from selling options premium.

However, please keep in mind that short selling options can ruin your entire portfolio, and it can even go that far that you can end up owing your bank or broker an astronomical amount of money. Unhedged short selling of options is the likely riskiest undergo you can come across. Avoid live trading with real money under all circumstances until you understand the theories and practice entirely after spending months of live trading in a simulated environment!

Table of Contents

What Happens When You Sell a Put Option?

First, you receive a cash inflow from the transaction. Options contracts are sold in lots of 100. That means that each contract is based on 100 shares of the underlying. For example, a weekly at-the-money put option for Walmart (WMT) is priced at $1.19. So when you sell one contract, you’ll receive an inflow of $119.

How Much Money Do You Need to Sell a Put Option?

The interesting thing about selling weekly put options is you don’t need a large bankroll. The main issue is trading commissions. Brokerages usually charge a higher commission for option contracts than traditional equity transactions. This eats away at your profit, so take that into account before you get started.

Selling weekly put options for income exposes you to future liabilities. If the share price of the underlying stock or index decreases, you’ll be liable to buy the shares back at the higher strike price. Because of this, brokerages will insist you post collateral to cover any future losses. Since options are mark-to-market each day, you’ll also be required to post an additional maintenance margin if your position declines. Different brokerages have different requirements, so discuss the issue beforehand.

Selling Weekly Put Options for Income Strategies

People that are new to options trading usually ask: when should you sell a put option? Well, the ideal time is when you expect the market to rise or stay flat. Put options profit when the underlying decreases in price and can be used for swing trading strategies. Since you’re selling the contract, you’re on the other side of the trade. When the underlying increases in price, you’re in the clear.

Selling Naked Puts

The term ‘naked’ means you sell put options without a hedge in place. This is the most basic strategy available, and you can generate monthly income by selling puts as long as the underlying doesn’t decrease. When deciding if it’s the right time to pull the trigger, you need to assess the current market environment.

Volatility spikes are a function of news hitting the wire: The US-China trade negotiations. Interest rate rhetoric from the Federal Reserve. Macroeconomic data like jobs reports as well as PMI/CPI numbers. Daily events like these lead to what professionals on Wall Street call ‘repricing risk.’

Analysts and traders reset their models to adjust for new expectations on economic growth, interest rates and overall market sentiment. This is your opportunity. Savvy traders who can gauge bullish or bearish sentiment and read through the tea-leaves of economic data have much better insight into where the market is headed.

It’s like predicting the weather. If you see sunshine ahead for the market, sell weekly put options for income. If clouds start to form, hold off for a better opportunity. Selling naked puts can lead to massive losses, and getting caught on the wrong side of a trade can ruin your life. In fact, selling naked puts is only for options trading experts with an excellent understanding of the market.

Bull Put Spread

A more advanced strategy is to incorporate spreads into your toolkit. A bull put spread is where you buy a put option at a lower strike price and sell a put option at a higher strike – both having the same expiration date. The higher strike is always more expensive, resulting in a cash inflow.

It works like this:

A weekly at-the-money put option for Walmart (WMT) is priced at $1.19. The strike price is $95. The same weekly put option with a strike price of $93 is only 52 cents. You can construct a bull put spread by selling the $95 strike for $1.19 and buying the $93 strike for 52 cents, resulting in a net inflow of 67 cents per share or $67 per contract.

The logic here is risk reduction. For example, if you sell a ‘naked’ put at $95, your maximum profit – per contract – is $119. Your maximum loss, though, is the underling going to zero, minus the profit from the put option contract: [(95-1.19) * 100] = $9,381.

Now obviously, the result is a little skewed. It’s pretty unlikely a stock goes to zero in one week – especially a well-run company like Walmart – but you get the point.

Now check out the numbers from a bull put spread perspective. Your profit and loss look like this:

Bull Put Spread Max Profit: [(1.19 – 0.52) * 100] = $67
Bull Put Spread Max Loss: [(95 – 93) – (1.19 – 0.52) * 100] = $133

As you can see, the risk-reward trade-off is much better. You’re hedged for any price reductions below the $93 mark by implementing the spread. Of course, you give up 52 cents in max profit, but I’m sure you can agree, the reduction in maximum loss is more than worth it.

Bull Calendar Put Spread

A bull calendar put spread is similar but uses a slight tweak. Here, you buy and sell put options with the same strike price but mix up the expiration dates.

The strategy looks like this:

Buy the weekly at-the-money put option for Walmart (WMT) with a strike price of $95, priced at $1.19. Then sell a two-week at-the-money put option with a strike price of $95 for $1.56. The net result is a cash inflow of 37 cents per share or $37 per contract. Like a naked put, though, you’re completely exposed on the downside. If the underlying goes to zero, you’ll be in for a loss of $9,463.

However, the reason for being such a popular strategy is that it allows you to trade time. If you expect volatility to spike sooner rather than later, you can position a bull calendar put spread, be fully hedged for the first week and earn income in the process. The downside – of course – is the second week the hedge is gone.

Our advice is to stick with the lowest risk options trading strategy if you’re just starting out and to always trade on paper or in a simulator until you are profitable.

Short Straddle

A short straddle is also very risky, so proceed with caution. Unlike the other three strategies, here, you implement call options into the trade. The main benefit of a straddle is it offers the highest income generation possible. The strategy is to sell both a call option and put option with the same strike price.

From the Walmart example, it means selling the $95 strike weekly at-the-money put option for $1.19 and selling the $95 strike call option for $1.06.

Short Straddle Max Profit: [(1.19 + 1.06) * 100] = $225

As you can see, the income potential is there. A straddle is best used when the market trades flat. Since you’re exposed to both the upside and the downside — a large spike in either direction will cost you dearly.

When analyzing your maximum loss, the numbers are scary. From a call perspective, the loss is unbounded. The underlying can increase to infinity, which means you’re liable for any gains. From a put perspective, the underlying can only go to zero.

Call Max Loss: unbounded
Put Max Loss: [(95 – 1.19) * 100] = $9,381.

As with a bull calendar put spread, short straddles are best used when you’re comfortable predicting the mood of the market. However, the exposure is immense.

Hedging Strategies With Inverse Index ETFs

If you’re keen on using the strategies above, there are ways to hedge your exposure so you gain the same risk-reward trade-off as the bull put spread without the downside of a naked position. When hedging a put position, you need an offsetting short position. The problem is, shorting requires a margin account, a stock loan fee and interest charges.

A more cost-effective approach is to use an inverse index ETF. You can use the ProShares Short S&P 500 ETF, which is a great proxy for the U.S. equity market. When you feel the mood music starting to change, and you want to hedge your put position, you can buy shares of the inverse ETF.

For example, if you have a $2,000 put position, you can buy $1,000 worth of the ETF and roughly cut your exposure in half. It’s important to note, though, indexes and options aren’t directly correlated, so the two will not reprice exactly alike. However – when accounting for costs — using an index to hedge is your best bet.

Conclusion About Selling Weekly Put Options for Income

Options are high risk. While day trading stocks is more challenging than long term investing, day trading options is even riskier. Make sure that you understand what you are doing here! Always start out with a demo account or trade simulation. Never risk your money right away.

Options trading strategies are complex. Some strategies like writing covered calls are easier to understand, while naked selling of puts might sound easy to understand first but done wrong, it can become a massive problem since it involves unlimited risk, and investors can lose money fast.

Options trading courses can help to understand options trading fully, and the chances are that more conservative options strategies generate better results long term. Those who want to trade options based on recommendations consider options trading alert services.

Selling puts typically has higher chances of success than selling call options. That’s because financial markets tend to rise more often than they fall. Selling weekly puts is, per definition, more of a swing trading style, while day trading options require other types of options trading strategies.

FAQ

Is there a risk selling puts?

Yes, selling puts naked without a hedge is a risky investment strategy, especially when the market price goes in significantly in the opposite direction. Buying and selling shares on the stock market is much more conservative and less risky.

What are covered calls?

As the term covered calls indicate, this options strategy is about hedging an options trade. If investors who own 100 shares of a company sell a weekly put option, then they are protected agains big losses and can earn income by selling covered calls for the premium.

What is the strike price?

The options strike price represents the price at which the underlying stock of an options contract can be bought or sold by exercising the options contract at or before the expiration date.

What are cash secured puts?

Cash secured puts are short puts that are protected fully with cash on an account for the case that the options contract gets exercised. The money is needed to buy the underlying stock (100 shares per options contract in the U.S. for the strike price traded).