Why would an investor sell put options instead of just buying the stock? You already know my response to this question – to create monthly income. There are several reasons investors should include put writing as a portion of their investment portfolio. Here is my list:
First and foremost is to create income. In this case, we are looking to collect the cash premium from selling the put option and not necessarily purchase the stock. This concepts is very important to better understand. My initial objective is capturing the premium but I realize in some cases the stock will be put to me. This is why I only sell puts on a select list of stocks I am willing to own if put to me. I like to focus on world class stocks that have stable earnings, strong balance sheets, pay growing dividends and trade within a low beta range in the market. This is part of my success using this strategy as I can collect dividends and sell covered calls for more income if the stock is put to me.
Secondly, I can purchase the stock at a lower price or discount to its current market price. The cash premium I collect from selling the put option reduces the capital outlay to enter or purchase the stock. I have experienced periods where I would sell monthly puts on a stock for 6 to 9 months before the stock was put to me. The amount of premiums added together made the entry price of stock significantly below the market price. For example, assume I average premiums of $100 over 6 months of monthly put writing which sums to $600. I have just lowered the purchase price of the stock by $600 – this is buying stocks at a discount.