My Game Plan for Investing: Selling Puts and Hedging with Options 

Content Details 

• Summary: This article outlines a specific investing strategy that involves selling put options until assignment, followed by hedging with options until a fundamental change occurs. The article provides an in-depth look at the mechanics of this strategy, its benefits, and potential risks. 

• Target Audience: Intermediate, Advanced 

Article Content 

My Game Plan for Investing: Selling Puts and Hedging with Options 

1. Introduction: Investing in the financial markets requires a well-defined strategy to manage risk and maximize returns. One effective strategy involves selling put options until assignment and then hedging with options until a fundamental change occurs. This approach can generate income and provide a measure of downside protection. 

2. Selling Put Options: Selling put options involves agreeing to buy a stock at a specified price (strike price) if the option is exercised by the buyer. This strategy can generate premium income and potentially allow investors to acquire stocks at a lower price. 

• Mechanics: When you sell a put option, you collect a premium. If the stock price stays above the strike price, the option expires worthless, and you keep the premium. If the stock price falls below the strike price, you may be assigned the stock, obligating you to purchase it at the strike price. 

• Benefits: This strategy provides income through premiums and the opportunity to buy stocks at a discounted price. 

• Risks: The primary risk is that the stock price falls significantly below the strike price, resulting in a loss. 

3. Assignment and Owning the Stock: If the put option is assigned, you acquire the stock at the strike price. At this point, you can implement hedging strategies to manage risk. 

4. Hedging with Options: Once you own the stock, you can use options to hedge against potential losses. Common hedging strategies include buying protective puts and selling covered calls. 

• Protective Puts: Buying a put option on the stock you own provides downside protection. If the stock price falls, the put option increases in value, offsetting the loss in the stock. 

• Covered Calls: Selling call options on the stock you own can generate additional income. If the stock price rises above the strike price, the stock may be called away, but you keep the premium. 

5. Monitoring for Fundamental Changes: Continue to hedge with options until a fundamental change occurs in the stock or market conditions. Fundamental changes could include shifts in the company’s financial health, market environment, or broader economic indicators. 

6. Practical Example: Consider a trader who sells put options on SPX (S&P 500 Index components). The trader collects premiums and may be assigned stocks during market dips. Upon assignment, the trader buys protective puts to limit downside risk while holding the stocks. If market conditions improve or a fundamental shift occurs, the trader may adjust the strategy accordingly. 

7. Benefits and Considerations: 

• Income Generation: Selling puts and covered calls generates premium income. 

• Risk Management: Protective puts provide downside protection. 

• Flexibility: The strategy can be adapted based on market conditions and individual stock performance. 

8. Conclusion: Selling puts until assignment and then hedging with options is a robust investing strategy that combines income generation with risk management. By focusing on current market conditions and being prepared to adapt to fundamental changes, traders can enhance their investing success.