A put is an option that offers the right but not the obligation to sell an underlying asset at a certain date for a predetermined price. The strike price is the determined price that you can buy or sell the underlying stock for, regardless of how much the stocks appreciate or depreciate in value. If they did, you could just wait for the market to turn in your favor.

The date your option runs out is called the expiration date, and it could be days or years after you purchase the option. When you buy an option, the price you pay for that option is called the premium. Option contracts give the buyer the right to buy or sell shares of the underlying stock. Therefore, when you calculate the cost for an option you need to multiply the premium price by When you first look at an option contract, it might be straightforward or it might be a little confusing.

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A put-selling strategy is one of the most effective options income strategies. The most famous investor in the world, Warren Buffett , uses a put-selling strategy.

Defining Options, First

Buffett made huge sums in the wake of the financial crisis using options to generate income. Instead of just buying a stock that he likes when it's undervalued, Buffett sells options when the stock is overvalued. Selling overvalued puts allows Buffett to rake in large premiums from his buyers. Buffett determines the value of an option based on implied volatility.

How to Make Money Through Options Trading

Implied volatility measures the amount of fear and greed priced into an option. One way to determine if implied volatility is high is to look at the VIX. Looking at a chart of the VIX can help you determine for yourself if implied volatility is high or low. Whether he buys the stocks at a reasonable price or keeps the premium from his buyer, he gets something he wants.

Despite the simplicity of this strategy, it does come with risks check out how to create a security risk analysis here. You need to set risk parameters when you sell options, just as you would with buying stocks.

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Understanding how much you stand to earn — and how much you could lose — will help you weigh out your risks. Selling puts allows you to set the strike price of a stock at what you would like to buy it for. I am in the trade for about 16 days on average. Most successful option traders I know expect to double their money annually. Once again, it takes years of study to fully understand how to trade options. Most amateurs enter option trading with a casino-customer mentality : strike it big and fast need a good deal of luck to do that and end up losing everything You have to study for years and then be patient and emotionless when you get into this field… Can you make money?

Definitely so but it is not for amateurs. Few ever consider those ramifications. I did this twice recently, thinking there is no way to get called.

Thanks for the article. Using a long term investor mentality to options, by writing covered calls and puts on safe dividend aristocrats is the only way to assure gains in any market. Stay out of currency trading, penny stocks, new issues, options, futures or any high-risk investments. This way, while you may experience modest losses when markets drop, you should show overall positive results over time. Click here to cancel reply. Please be respectful with your comments and help us keep this an area that everyone can enjoy.

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Do the Buffett: How to Sell Puts Like Warren Buffett

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How To Make Money Trading Call Options

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