If the stock is $13.50, you get at least $1.50 for the $15 put because that’s how much the stock is in the money. Let’s say you sell ten contracts. That will generate $1,500. However, that is all intrinsic value. Depending on the time to expiration, there will be added to this the time value, perhaps another 50c. That’s $2 or $2,000. The cash will be in your account the next trading day.
|
Stock Price |
Strike Price |
Option Price |
|
$12.50 |
$15 |
$3.50 |
|
13.00 |
15 |
2.75 |
|
13.50 |
15 |
2.00 |
|
14.00 |
15 |
1.25 |
|
15.00 |
15 |
0.75 |
|
15.50 |
15 |
0.25 |
|
16.00 |
15 |
0.125 |
|
17.00 |
15 |
No bid |
You now are obligated to purchase 1,000 shares of this stock at $15. I’ll discuss movement and what we have accomplished, but to do so we need to see the relationship between the stock and put option prices.
Obviously, these prices are a snapshot in time. The option prices would be significantly higher if we went out several months, and significantly lower if the stock is not close to $15, or if it’s just a few days until the expiration date.
Back to the strategy. Again, we have obligated ourselves to buy this stock at $15. We have made $2,000 cash and it is in our account. We now play the waiting game. The big question is this: Are we willing to buy the stock at $15, or do we want to buy the stock at all? If the answer is no, then you probably should not have sold the right to someone to sell it to you at $15. Simply put—you had better like this company, AND LIKE IT AT THAT PARTICULAR PRICE, or you should not have done this.
Okay, you have $2,000 cash in your account, now what do you want to happen? If you don’t really want to buy the stock (which is my desire in about 99% of the cases where I’ve sold puts), but wouldn’t mind, then you hope the stock goes up.
If the stock moves above $15 (or close to $15), the stock won’t get put to you and you get to keep the money ($2,000). Remember, that was a deciding factor—you thought this stock was going up.
If the stock doesn’t perform this way, then you will now own the stock. It will be in your account, the Thursday after the third Friday of the expiration month. Before we explore briefly what you can do with the stock, let’s look at what happened.
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