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Cashing In on Put sales: Where’s the Appreciation?

Updated: Jun 29




Selling puts are so cool, you already know this if you’ve read this blog or watch my trades in discord!  When we sell a put, we collect cash immediately with an obligation to buy a stock at a lower price. It’s a payday where you can be wrong and still make money!  


There is one problem with put sales that not too many people think about, and today I want to change this because I want you get cash flow AND appreciation which is every investors dream!


Lets quickly review why put sales are cool:


Simple Setup and Management:

 

The trade setup for a put sale takes less than 5 minutes.  By combining math (probability of profit, expected range, standard deviations) with a touch of technical analysis it makes sense why put sales are my most profitable strategy over the last 10 years.


Trade management is straightforward because we use a good till cancelled profit target and an alert at your puts strike price and we walk away and don’t even have to look!


If the alert triggers, we either roll the put out in time for a credit, many times we can roll to a more favorable strike, or we take shares of the company at a discount.


If the stock bounces, we collect 50% of the credit received and look for the next trade.

 

The downside of selling puts:


When a put sale hits the profit target and you buy to close the put, or you let it expire worthless you received the income, but you don’t get any shares of the stock! You got the cash flow, but you have zero assets appreciating.


Remember shares of stock are like assets. I talked about this in real estate mindset webinar! My shares of GOOGL, AMZN, COST, MSFT, WMT are assets just like a rental homes. If I only sold puts on these I wouldn’t have any shares today.


So while many focus on the obvious risk of selling puts like market risk, capital requirements, and limited profit potential as downside of put sales. I think it’s important you realize that selling premium should only be part of your strategy.


Considering using some of the premium you received from the trade to purchase shares after your put sell closes.


A solution to the downside:


I have a few different strategies for adding shares, but for simplicity and brevity let’s look at one strategy you can consider.


Many times I sell puts on the same company over and over again as you've seen in discord. Rinsing and repeating what works!


This chart shows my trades in HOOD from the last 6 months:


I've sold puts 11 times in Robinhood. This is not a fabricated example, I’ve really done this. If Hood has a down day of more than 3% I consider selling a put. The put closes in a few days and I keep collecting premium.


Every time 2 put sales close I buy a share of stock (for each put I sale). Depending on your account size this might be selling 1 put and buying 1 share, (or it could be 5 or 10). As your account grows, you can do a ratio where you keep some of the cashflow from the put and you buy less shares.


More specifically if I sell a put for a credit of .20 and I close it at 50% I collected $10 in real dollars. Two successful trades is at least $20 real dollars, many times selling puts on down days gets us even more premium which is enough to buy a share of the stock.


Assuming I only sold 1 put and bought 1 share from the 11 trades in the chart above after every two trades I have 5 shares of HOOD at a cost basis of $15.86  The stock is trading at $23.38 as I posted this blog. I’m up $37.60 on these shares, and yes it's going to take a while to get 100 shares, that's why adding capital to your trading account through savings is such a great way to compound your success!

 

Think about the risk of these shares, since I bought these using profits, what is my actual risk? Of course I don't want to imply you should let these go to zero because we bought them with profits, I want you to think about them a little differently than just the p/l you see in your broker.


Every time we sell another put we are obligated to buy 100 shares, but the shares we buy with profits do have a different risk profile in my mind especially if I like the company and don't holding these for a longer timeframe.  Have a plan for selling the shares, but that’s an article for another day!  

 

Summary:

Keep in mind that the downside of selling puts in a bullish stock or bullish market is you don’t get the shares if the stock bounces. In real estate terms you got the cash flow, but you have no asset appreciation in terms of share price, unless you build a strategy to pickup some share from your put sale profits.

 

Happy Trading Good Kids!

-Justin


I understand the stock market can feel intimidating and complicated, if you want some extra support and guidance, I help people skip levels, schedule a free discovery call with me. Lets talk stocks and see if I can help you! Click on the image below and setup a time that works for you!





This is not trading advice, it's for your education. I'm a dude on the internet who’s been trading for 2 decades, and I use the stock market as my primary source of income. None of this is financial advice. Any trades or decisions you choose to make are at your own risk, this is purely educational!

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