Short Selling Put Options

When short selling put options, a question people ask me is, “Okay, Markus, how do you decide what strike price you want to sell and whether there’s enough premium in there?,” explains Markus Heitkoetter of Rockwell Trading.

I made a put options calculator called “The Wheel Calculator” that I gave away as part of my recent class on selling put options (Theta Kings) that helps me determine just that. This calculator is now also integrated within The PowerX Optimizer Software as well.

Using my put options calculator, I can enter a few different figures and it quickly lets me know if this stock makes sense to sell put options on.

Around the beginning of March 2020, I started a small account with $25,380. Right now, it’s trading over $33K at the time of this article. This was all done by selling put premium using my hand put options calculator! So, let’s take a look at a few examples using the airlines.

Here’s how you can quickly compare if an option makes sense to sell.

United Airlines (UAL), at the time of this was trading at $31.08/share. I’m going to take a look at the April 24th expiration and the $20 strike price. I’m thinking maybe it would be a good idea to sell the $20 United Airlines put option.

Now that I have the strike selected that I would like to sell put options on, let’s take a look at the premium these options have. This will let us know if this trade actually makes sense. Right now, the Bid/Ask is $0.74 over $0.87. So, I probably can get $0.80 for selling this option. This is all I need to enter in my spreadsheet, along with the expiration.

With the needed inputs entered into my handy dandy put options calculator it tells me, “United Airlines can drop 36% and you’ll still be okay.” It has to drop 36% before we get in trouble. I think that’s pretty good odds in my opinion.

The cool thing is that it also says that based on my account size, I should buy 17 options, and I would collect $1,320 in premium. This means that per day I would get $110 in premium. That’s not bad at all if I can make $100 on just one position. And I like to have 4 to 5 positions in my account at any given time.

Based on the number of positions I like to have; this means that you can make $400 to $500 per day collecting premium. I like this a lot because it means annualized, I would make 87%! 87% is nothing to sneeze at, right?

Short Selling Put Options – American Airlines

Now let’s do this same thing with another airline, American Airlines (AAL), and see how the numbers look. Like we did with UAL, I’m looking at what strike price in relation to where AAL is trading would it make sense to sell. For American Airlines it looks like probably the $8 strike price would make sense right here.

You always want to do it below the previously established low. So let’s take a look at American Airlines. The price was $12.26. The options strike price, we said we’d probably have to look at is $8.

Here we’re able to collect $0.35 per contract at the $8 strike price. And you see, I could actually, since American Airlines is so cheap, buy 41 options based on my account size. So, 41 options and I would collect $1,444 in premium. This means I would get $120. That’s not bad at all.

American Airlines also can drop 35% and we would still be OK. We only get in trouble if American Airlines drops more than 35% over the next 15 days. Possible? Yes. This is why you should always be willing to own the stock. And this is why you want to make sure that you’re not getting in trouble. You need to adjust your position size based on your account.

Here obviously, I don’t want to trade two airlines because if airlines are crashing, they probably all do. With that said, let’s take a look at Boeing (BA).

Boeing Example

Let’s take a look at the Boeing chart and see where a good level might be here to sell Boeing.

Based on where BA is trading at right now, it looks like $100 would be a good level to take a look at. Let’s first try a strike price of $100, shall we? For $100 we get probably a $1.55 right here, with Boeing trading at $150. If we were to sell the $100 put option on BA, we would be looking to make $1.55/contract.

And you see, this means that Boeing could drop 33%, so we’re good here. However, we can only buy three options. Why? Because Boeing is really expensive. If we would have to buy Boeing at $100, this is when it gets expensive, right?

The strike prices here are much, much, much lower. This is where I would only trade three not to overextend myself. And that’s very important when you’re selling puts. You want to make sure that you’re not overextending yourself because otherwise, you’ll get margin calls.

Margin calls are ugly. A margin call means that your broker tells you, “I want more money.” You want to avoid that at all costs! If you don’t have the money, you would have to sell the stock at a price that you don’t want. Usually, this is how you can wipe out an account.

Anyhow, this is how we would only make $43 a day. Let me ask you, what would you rather make? $110 to $120 per day? Or $43 per day? I don’t know about you, but for me these are better. So, it’s very easy to quickly compare which options you should be trading when you’re selling puts.

One of my favorite trading strategies right now is selling puts.

This is what you have seen in the past few examples. My goal is to make $400 to $500 per day by doing so. The best days to sell puts is on a down day. On a down day, the SPX Volatility Index (VIX) is usually shooting up and option premiums are higher. This is exactly what you’re looking for as a premium seller.

For experienced options traders, selling put option premium in an environment like this can be a great way to consistently generate income, even if the stock doesn’t do exactly what you want.

I hope this helps!

Learn more about Markus Heitkoetter at Rockwell Trading.