Put Writing for Income

Put writing generates income because the writer of any option contract receives the premium while the buyer obtains the option rights. If timed correctly, a put-writing strategy can generate profits for the seller, as long as they are not forced to buy shares of the underlying stock. Thus, one of the major risks the put-seller faces is the possibility of the stock price falling below the strike price, forcing the put-seller to buy shares at that strike price. If writing options for income, the writer's analysis should point to the underlying stock price holding steady or rising until expiry.

For example, let's say XYZ stock trades for $75. Put options with a strike price of $70 aretrading for $3. Each put contract is for 100 shares. A put writer could sella $70 strike price put and collect the $300 ($3 x 100) premium. In taking this trade, the writer hopes that the price of XYZ stock stays above $70 until expiry, and in a worst-case scenario at least stays above $67, which is the breakeven point on the trade.

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