Can You Short An Option

People always talk about buying options. But that isn’t the only way you can use them to increase your returns in the stock market. You can also short options and make money from the premium.

Let me explain how this works. A put option gives you the right to sell a stock at a certain price on or before a certain expiration date. So for instance if you buy the $40 put for $3 you have the right to sell your stock at $40 before the expiration date.

But for every buyer there is a seller. Somewhere in the world there is someone who sold that put and made $3 but had the obligation of buying it at $40 if the buyer exercises his right.

So you can technically short options and profit from the premium. And in many cases it can be extremely profitable. You do not need the stock to make a drastic move if you sell out of the money. You only need the stock not to move against you too much to be profitable.

Of course there can be a major downside to selling options. If the stock drops to $10 then you would be forced to buy this $10 stock at $40, which would not be a very pleasant feeling. Even though there is a lot of potential downside that risk can be reduced to a lower point.

For instance you can decide not to sell puts on any stocks you would not mind owning for the long term. This way if you do get called out you simply get into a position that you wanted to get into in the first place.

For more on selling puts visit http://www.stocks-simplified.com/selling_puts.html

For more on option spreads visit http://www.stocks-simplified.com/Option_Spreads.html