Short Selling Put Options


Today, let’s learn about short-selling put options. This is the question I am usually asked when it comes to this particular trading strategy:

“How do you decide the strike price to sell the put options for and how do you determine if this is enough premium?”

I actually made a put options calculator called the Wheel Calculator. If you were a part of my Theta Kings class on selling put options, you know what I’m talking about. This is an amazing tool that helps me determine the answer to both of those questions.

Below is a screenshot I took of my put options calculator. All I need to do is enter a few different figures, and the calculator will tell me if it makes sense to sell put options for this particular stock. 

short selling put options

So let me take you back in time a bit here to show you an example of this. Way back in March of 2020, I started a small account for selling put options, with a total of $25,380 in it. 

Within a few months, I had managed to get this account balance up to over $33,000. I did this just by selling put premiums and collecting weekly ‘paychecks’. For every trade I made, I used the put options calculator to help me make my decision!

Let’s take a look at a few examples of trades I made with some airline stocks!

How to Determine When to Sell an Option

So remember, we’re back in March of 2020 for these trades so the prices will look a little different than they do today.

At that time, United Airlines (UAL) was trading for about $31.08 per share. I took a look out to the April 24th expiration date on the options chain and chose the $20 strike price as a decent put option price. 

Sorry, before I get any further I should make sure you all know what I am even talking about here. If this sounds like a different language, check out this free Options Class first so you can get a knowledge foundation for trading options. Here’s the class: Options 101: A Beginners Guide To Options.

Short Selling Put Options – United Airlines Stock

Okay back to our United Airlines trade. Now that I have selected the $20 strike price, I always check with my put options calculator to see if it makes sense to go through with this trade. 

At the time, the Bid/Ask was $0.74 over $0.87, so I can reasonably get about $0.80 in premium for selling this option. And as you can see, I’ve entered that into the spreadsheet, along with the expiration date. 

Rockwell Trading Put Options Calculator UAL, DAL, BA

Take a look at line 11 in the put options calculator. This is key information for this trade because this tells me that UAL stock can drop 36% in price by April 24th, and we’ll still be okay. Considering UAL’s stock is fairly stable, I think those are pretty good odds for this trade.

Next, take a look at line 12 in the screenshot. It takes my account size of $33,000 and calculates that I can afford to buy 17 options contracts for UAL and I would collect a total of $1,320 in premium. 

This also works out to $110 per day in premium which isn’t bad at all! Especially when you consider that I like to have at least 4 to 5 positions open in my account, that’s potentially $400-$500 per day in premium I could be making.

short selling put options

In my opinion, $400-$500 is incredible, and it only takes a few minutes to trade these options for UAL. If we look at line 17 in the previous screenshot, it shows that if we annualize this, I would make 87% on my investment and that’s just from one trade! 

Short Selling Put Options – American Airlines Stock

Alright, so now I’m going to show you the trade with another airline stock: American Airlines (AAL). 

Follow the same process as we did with United Airlines above. I’m always looking for a strike price in relation to where the underlying stock is trading that would make sense to sell the options for. 

For American Airlines, I am looking at the $8.00 strike price for the same April 24th expiration date. 

American Airlines AAL Option Chain

One trick when choosing the strike price: always choose a strike price below the previously established low. That usually acts as a support level so it adds an extra level of protection for your strike price. 

So the price at the time for American Airlines was $12.26 per share. For the $8.00 strike price, I would collect about $0.35 per contract. 

Since AAL is so cheap, I could trade 41 options based on my account size of $33,000. 

The put option calculator told me that for 41 options on AAL, I would collect about $1,444 in premium by April 24th. This equated to $120 per day so not bad at all!

Again, using line 11 of the calculator, I saw that AAL could have dropped by 35% and my options would still be okay. Could AAL drop by 35% over the next 15 days? Of course! Anything is possible, but the odds are definitely in my favor.

This is also why one of the rules I live by is that you have to always be willing to own the stock. If you do end up getting assigned, you don’t want to be stuck with a stock you don’t like.

You should also be adjusting your position size based on your account balance. Don’t overtrade your account or you’ll find yourself getting into trouble if the market suddenly crashes. 

Another point is that I won’t usually trade two airlines or two stocks in the same industry. If the airline sector suddenly crashes, as it did in March of 2020, then they will all likely fall together. This could put both trades at risk!

Short Selling Put Options – Boeing Stock

Let’s look at another example of a trade I made with Boeing (BA) stock. I like trading Boeing, because it’s generally a stable stock that doesn’t see too much volatility. Plus, it’s a great company so I don’t mind owning the stock if I get assigned.

Let’s take a look at the Boeing chart and see where might be a good level here to sell Boeing.

Chart Of Boeing BA

Okay, so based on where Boeing was trading at the time, I liked the $100 strike price. 

So Boeing is currently trading at about $150 in this screenshot from March of 2020. From the options chain, I saw that the $100 strike price would pay $1.55 in premium for each contract. Not bad right?

When I input the numbers into the put option calculator, it showed me that Boeing could fall 33% by April 24th and my position would still be safe.

However, since Boeing’s stock is so expensive, I could only buy three options contracts. 

Why not more? Because I don’t want to overextend myself. If something goes wrong, this would likely result in a margin call. That is something we want to avoid at all costs. Margin calls are ugly and an almost sure way to blow up your entire account. 

So since I could only afford three options contracts for Boeing, I would have only made about $43 per day. Let me ask you, what would you rather make? If you’re asking me, it’s $110 or $120 per day from United Airlines and American Airlines. 

This is the power of the put options calculator and the easiest way to determine if a trade makes sense for you to do. 

Selling Puts is One of My Favorite Ways to Trade

I’m being perfectly honest here: I love selling put options!

It is a relatively safe way of reaching my goal of making $400 to $500 per day by trading. 

One more tip: always try to sell puts on a down day for the markets!

When the markets are red, it means the VIX or Volatility Index is shooting up so options premiums are higher. This is exactly what you want as an options seller who makes income off of premiums.

For experienced options traders, selling put option premiums in a volatile market environment is one of the best ways to consistently generate income, regardless of what the underlying stock is doing. 

I hope this helped! 

Read Next: The Poor Man’s Covered Call Explained

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