I prefer to mention the disclaimer to this article upfront, the reason being the high risk involved in option selling.
Disclaimer: Option Selling requires a huge margin as compared to Option Buying, Option Selling can erode more than the capital deployed for Options Trading. Option Selling is best used by Professional traders and may not be suitable for retail investors.
Put Option is one among the two types of option and the other one being a Call Option. Put Option Selling can be divided into three types as mentioned below:
- Cash Secured Put Option: This strategy involves selling a naked put option without holding any underlying stock or index but with an intention to buy and hold the underlying asset.
- Naked Put Option Selling: This strategy involves selling a naked put option expecting the underlying stock or index price to go up.
- Selling Put Option as part of hedging stgrategies: Three popular strategies to sell a put option as part of hedging strategy includes Covered Put, Short strangle and Short Straddle.
Three different conditions to sell a put option and selecting the strike price:
- Put Option selling for the short term: Strike price should be selected close to the 20 Day Moving Average (DMA) or price close to the lower band of the Bollinger band with an hourly candlestick chart.
- Put Option selling for medium-term: Strike price should be selected close to the 50 Day Moving Average (DMA) or price close to the lower band of the Bollinger band with a daily candlestick chart.
- Put Option Selling for the long term: Strike price should be selected close to the 100 Day Moving Average (DMA) or price close to the lower band of the Bollinger band with a 2 Day candlestick chart.