Selling Puts on a Stock You Already Want to Own

I sometimes sell put options on a stock I already want to own. The premium can be useful, but it is payment for taking on an obligation. I decide whether that obligation makes sense before I consider the premium.

What selling a put commits you to

A put gives its buyer the right to sell a stock at a set price, called the strike. The person who sells the put collects a premium up front. If the buyer exercises the put, the seller must buy the shares at the strike price, whatever the shares are trading for at that moment. The SEC’s Investor.gov options bulletin describes that obligation and warns that people who sell options can face substantial losses.

Buy part of the position first

If I want to buy a stock and I like the price, I may buy some of it outright so I have a position before selling puts. I decide how much to own and how large an assignment obligation I can accept before I place the trade.

If the put is assigned, I have to buy the shares at the strike price even if the market price has fallen well below it. The premium does not erase that loss. If the stock rises instead, I keep the premium but may miss some of the gain I would have had from buying more shares outright. This is why I start with a company I already want to own and a price I have studied. My position size depends on what I think of the business and its numbers. How much research is enough before investing explains why I make that judgment without expecting certainty.

Timing will never be perfect

I do not expect to time the market perfectly. I cannot know every piece of economic information or how every other investor will react to it. A price that looks attractive today can look less attractive next week. That uncertainty is a reason to study the company and size the obligation carefully.

Waiting has a cost too. Sometimes I buy a company and the price falls further before it recovers. Other times I wait for a lower price that never comes. Neither outcome proves that selling puts was automatically the right move. I have to weigh the price, the business and the obligation I would take on if assigned. I discuss that wider choice in what I look for before I buy.