The Two Outcomes Every Put Seller Must Understand

During their recent episode of the Value Options Letter and Acquirers Podcast, Travis and Tobias discussed The Two Outcomes Every Put Seller Must Understand. Here’s an excerpt from the episode:

[Tobias] So Tim, just let me summarise very quickly. For every position, there’s always two outcomes. One is that you end up owning the stock.

And the other is that the option expires in the money and you collect the premium. In both instances, we want to make sure that we’re happy with that outcome. And if we’re assigned the stock, we’re always trying to buy, set a strike below where the stock is currently trading.

So the expectation is that the option would typically expire without the stock being assigned. But if we are in fact assigned, that creates another opportunity for further put selling or further call selling around the stock that we’ve received.

[Tim] Right. So the way to think about it is when we’re selling puts and we’re actually exercised, what we’re doing essentially is manufacturing a cheaper entry price into the stock. And you’ll see in one of the examples that we’re going to give towards the end of this presentation today, you’ll see how powerful that is because often you’ll miss the biggest part of the downturn in the stock.

And so we’ll get into that. So let’s keep going. But good question there.