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Mar 17, 2023
Selling puts over buying shares
Selling a put option is a strategy that involves selling a put contract to a buyer, giving them the right to sell shares of stock to the seller at a predetermined price (strike price) on or before a specified date (expiration date). Here are four reasons why selling a put may be better than owning shares:
Income Generation: Selling a put option can generate income for the seller in the form of the premium paid by the buyer. The seller keeps this premium regardless of whether or not the option is exercised. In contrast, owning shares only generates income through dividends, which are not guaranteed and can fluctuate.
Lower Cost Basis: Selling a put option at a strike price below the current market price allows the seller to acquire the shares at a lower cost basis if the option is exercised. This is because the premium collected reduces the net cost of the shares. In contrast, buying shares at the current market price has a higher cost basis.
Limited Downside Risk: When selling a put option, the maximum loss is limited to the strike price minus the premium received. In contrast, owning shares has unlimited downside risk as the price of the shares can decline to zero.
Flexibility: Selling a put option provides the seller with flexibility. If the option is exercised, the seller can acquire the shares at a lower cost basis. If the option is not exercised, the seller can keep the premium and potentially sell another put option. In contrast, owning shares does not provide the same level of flexibility.