selling put options is a relatively simple options trading strategy that can yield attractive results the strategy has a high probability of success in Rising neutral and even slowly declining markets in this video I'm going to cover everything you need to know about selling put options for monthly income including specific examples how to reduce the risk of the strategy and a put selling study in Amazon from 2023 to showcase the strategy's potential if at any point in these sections you feel like you've got these Concepts down or already familiar with them feel free to skip ahead using the chapters below first let's cover the basics of put options just in case you don't understand what they are put options are Financial contracts that give the buyer the ability to sell 100 shares of stock at a fixed price before a specified date so when you buy a put option you get this ability to sell shares of stock at this fixed strike price and this value is going to increase as the stock price goes down so when you're you're buying a put option you are essentially buying an insurance contract against a Stock's price decrease as the stock price decreases the puts value will increase because the value of selling shares at this fixed price which is called the strike price increases as the share price gets lower and lower this is just a simple graph to demonstrate that when a Stock's price goes down we can see that the puts price goes up so on the top half of the chart we're looking at Tesla's stock price and on the bottom part of this chart we are looking at a specific option on Tesla specifically I put option we can see that the stock price in this example Falls 23% and the option price increases by 100% And this is just demonstrating that put option prices go up when the stock price Falls and this generates gains for the option buyer however if the stock price remains above the put strike price as time passes the puts value will Trend to Zero by its expiration date and at expiration there's no more time left for the stock to fall and increase the puts value and since there's no value in selling shares at the strike price here which is lower than the current stock price this put option will expire worthless so the insurance contract essentially expires worthless because the disaster scenario did not happen and this means that the puts price will decrease and for every option buyer there is an option seller and this means whoever sells the put option if the stock price remains above its strike price over time this option will decrease and the put seller will profit by the amount that they sold that put option for so just as a quick recap when you're buying puts that is a bearish strategy you're going to make money when the stock price Falls and when you're shorting or selling puts that means you are implementing a bullish strategy which will make money as the stock price increases in the context of selling or shorting puts we actually only need the stock price to stay above that strike price as time passes in this first example let's say we have an investor who is bullish on Amazon but doesn't want to pay for 100 shares of stock because that's pretty expensive so instead they are going to sell a put option to gain exposure to an increase in Amazon stock price but they can make a really solid return on their money with a far less amount of money as compared to buying 100 shares of stock in this example Amazon is starting at $85 per share and this investor sells an 80 strike put in Amazon the price that they sell this option for is $3.55 and when we're talking about options we have to multiply the price by 100 since every option can buy or sell 100 shares of stock and when we multiply the price by 100 we get $355 and if we sell this put option that means we collect $355 into our accounts so on this next slide we're looking at a chart of Amazon stock price relative to the stke price of the put and in the bottom half of this graph we're looking at the profit and loss of this position which is selling the 80 put as mentioned a short put will profit so long as the stock price remains above the strike price which in this case is $80 over time the max profit occurs if the stock price is above the strike price at expiration once this option is closed or allowed to expire worthless then the investor can continue selling put options and potentially make more and more money every single month one thing that I want to mention here is that you can close your short put position at any time and it is wise to do so if you get a significant portion of your max profit early in the trade and as we can see in this trade we saw a profit of over $250 which is 71% of the profit potential very early in this trade as Amazon shares went higher so since I shorted this put for a total value of $355 that is the max profit potential and so if it goes up to a profit of $250 within the first two weeks of the trade we can see there's still you know 33 to 30 days left until expiration but there's only another $100 that we can make and so in this example a Trader could have bought back the put for $100 let's say and secured their gain of $255 so that's how the profit and loss works when you're selling or shorting any option if the price Falls from your initial sale price you can buy back the option paying less than you initially received and and you're left with your profit but as I mentioned earlier if a Stock's price Falls especially really significantly then put prices on that stock will increase and if we short a put option in the stock price plummets and the put value that we sold surges we are going to have losses on our position in this example we are looking at Apple and we are shorting the 185 put in this specific example the sale price of this put initially was $1.90 which means we would collect $90 into our account for selling this put option but as we can see the stock price plummeted and the put position lost value but if we were to compare that to buying 100 shares of Apple stock at the beginning we would not have lost as much money so the stock price at the end of this period was $171 121 and the ending put price was $13.79 so this would represent a value of 1,000 $379 and since we shorted this put initially for $190 and the put value Rose to a total value of $1,379 we are left with a loss of right around $1,200 on this short put position like any option strategy selling put options has risk and that is going to happen if the stock price collapses now in this particular trade there are two choices at the time of expiration the trader can buy back the put for $13 79 and lock in that loss or the trader can hold the put option through expiration and take assignment of 100 shares of stock at the strike price which is $185 when it comes to options there are two terms called exercise and assignment if you own an option you have the ability to exercise the option which simply means to convert that option into a stock position at the options strike price in the case of put options if you exercise a put option that you own you are choosing to sell or short 100 shares of stock at the put options strike price in this case if we buy the 185 put and decide to exercise that 185 put we will effectively convert our 185 put into negative 100 shares or we will sell 100 shares at the strike price of 185 but there is a seller for every option buyer in this example if we short the 185 put put and we get assigned on this 185 put then we will have to buy 100 shares of stock at the shg price of 185 so here's a very simple representation of what would happen and our original position is shorting the 185 put and if we get assigned on this put option we will buy 100 shares of stock at 185 per share I want to note that your risk Remains the Same before and after assignment so when you short a put option your Max loss occurs if the stock price goes to zero and if you buy 100 shares of stock you're going to have the same Max loss potential if the stock price goes to zero you're going to lose $185 per share times $100 which is going to be a loss of $188,500 and the same would be true if you were to short a put option but fortunately the stock price going to zero is really really unlikely but for all intents and purposes of this video when you're selling put options that is is the worst case scenario is to see the stock price go to zero because then the put option will essentially be worth its strike price which is going to be worth a lot more than you sold it for and therefore you're going to have big losses on that position while it is unlikely to be assigned on an option before expiration especially if there is a couple weeks left until expiration if you hold an in the money option through expiration you will automatically be assigned on that option so any options held through expiration that are in the money by one penny or more are automatically exercised and assigned a put option being in the money simply means that the stock price is at least one penny below the strike price so for example if we short the 185 put if the stock is at $184.99 or lower and you hold the put through expiration you will be assigned on that put option and effectively buy 100 shares of stock at the strike price of 185 the reason Reon I'm telling you this is because if you do sell an option and it becomes in the money well before expiration you can avoid the assignment process by buying back that option and locking in the loss and then moving on to the next trade due to the high cost of buying 100 shares at the put strike price and just simply the highrisk nature of selling a put option and seeing the stock price collapse selling put options can require a high margin requirement which is simply the amount of money that you need need to enter the trade for example I just pulled up an Amazon option to see the margin requirement and I went to the 125 strike price with 44 days to expiration this puts price was $25 which gives us a maximum profit potential of $25 the margin requirement to enter this position was $1,669 and if we run the numbers here if we have a $25 maximum profit potential and we have a margin requirement of1 $1,669 this gives us a maximum return on capital of a positive 12% in 44 days so while there is a high margin requirement for selling put options the return on that margin requirement can be really substantial especially when we consider that this is over a 44-day period to showcase the potential performance of selling put options for monthly income I wanted to run a quick study so I went to Amazon and ran a monthly short put strategy from January 2023 until the present date which is the beginning of November what I did was start on the first trading day of January and I went to the February monthly expiration cycle and then from then on on the day of expiration I went to the following monthly expiration cycle which had about 30 days until expiration and I chose a put strike that was 5% below Amazon stock price and I just repeated that strategy from January until present and here's a final graph visualized ing the entire strategy so on the top half here we have the Amazon stock price versus the put strike prices that were used in this study so we can see that we started here and as Amazon stock price went higher the put strike stair stepped higher with the stock price when the strike price changes that is essentially expiration so as long as the stock price is above this yellow line when it gaps up that means that it expired worthless and had the maximum profit potential as we can see here this was the losing trade because Amazon stock price fell well below this yellow line which was the strike price used for this trade on the bottom half of this graph we have the cumulative p&l of this short putut strategy in Amazon and as we can see for almost the entire year the strategy was consistently making money monthin month out showcasing that selling puts can be a viable monthly income strategy unfortunately we did have this one big loss um but we'll talk about later how we could have avoided that or how we could be more cautious in the future and lose less money on those losing trades but overall this was a very successful test and this showcases that if you have a stock that is in a upward Trend and you're selling put options monthin and month out you can see very steady profits over time here is the monthly p&l table showing the month of entry and all the pnls the estimated margin requirement and then the return on capital for all of these trades as we've gone over every single trade is profitable um except for the September entry and the cumulative p&l came out to a positive $1,473 now I want to talk about how you can reduce the risk when selling put options as a monthly strategy the first and easiest way to reduce the risk when selling puts is to instead sell put spreads which are called put credit spreads a put credit spread is the combination of a short put which is the strategy we've already already talked about but we're going to combine that with a long put at a lower strag price so we're going to short a put at this strag price and then to limit the losses on the strategy we buy another put at a lower strag price and this gives us a trade with limited loss potential and far less loss potential than selling put options all by themselves here are two risk graphs that I created this is a short putut risk graph which shows a hypothetical short 240 strike put with 60 days to expiration and the stock price is at $250 at the time of Entry we can see that as we've already discussed we have profit potential if the stock price at least remains above the strike price over time but if the stock price plummets we have a lot of loss potential on the downside on the right hand side we're looking at the short 240 put in addition to buying the 230 put so as we can see here we're looking at essentially the same strategy except we're limiting the risk by buying that 230 strike put and again stock price is starting at 250 but the big difference here is if we go to the downside we can see that this strategy has a maximum loss potential of around $750 whereas this short 240 put has loss potential that far exceeds $750 what you're going to give up though is you're going to give up some profit potential so if we look at the max profit of the 240 put by itself this put option can make around $500 at expiration and if we look at the put spread we see that the max profit potential is right around $250 however I will mention that the put spread will have a far lower margin requirement as compared to selling the put option and that's because the put spread since it has a max loss potential of $750 the margin requirement for this position would be $750 whereas the margin requirement for this position which is the short 240 put all by itself this margin requirement would probably be4 or $5,000 so if we were to actually match the margin requirements we would actually have far more profit potential with the put spread which you could argue is a case for selling put spreads as opposed to selling puts by themselves the second way to reduce the risk of selling put options is to be cautious after big stock market increases here's a chart of Amazon from 2023 until present and as we can see over this test period that we just looked at Amazon stock price was on an absolute tear now the big loss that we saw which was selling the 135 put in September this position lost $770 because we sold a put literally right here so Amazon had a huge price movement higher and we sold a put option in that test with a stag price of 135 right at the top of this rally and then the stock price fell off a cliff and obviously that's not a good thing to see when you are shorting put options and if we zoom out a little bit to the weekly time frame we can get even more confirmation that that was a risky time to sell puts in Amazon because we saw historically we did see a big sell-off in Amazon at around the 140 price level and the stock price went all the way down to $70 and if you believe in technical analysis and you look at support and resistance zones this obviously would have been a very risky spot to short put options as the stock price was coming into a zone of resistance the Third way to reduce risk when selling put options is to wait for high implied volatility because High implied volatility means you are selling more expensive options also when you have high implied volatility since option prices are broadly more expensive this means you will be able to sell a put option with a strike price that is further below the stock price to collect the same amount of Premium as a lower implied volatility environment with a higher strike price and I'll give you an example of exactly what that means here is a table of simulated put prices and we're assuming a stock is at $150 and we are looking at options with 60 days to expiration and these are the simulated 140 strike put prices at various levels of implied volatility with implied volatility at 15% we get a estimated option price of 42 cents and when we stair step all the way higher if we go to an implied volatility environment of 30% this 140 strike put option is now estimated to be $2.79 and so there's a huge difference of selling a put option that is $10 below the stock price when we have a 15% implied volatility versus a 30% implied volatility and just to give you an example what I was talking about earlier if we have an implied volatility environment of 15% and the 140 strike put is 42 cents if we are instead instead in a 255 or 30% implied volatility environment the put option that is going to be 42 cents is going to have a strike price that is well below 140 for example it might be 130 or 125 I'm not exactly sure but to collect the same amount of Premium as this 15% implied volatility environment when we are in a higher implied volatility environment you can go to a much lower strike price to collect the same amount of Premium implied volatility is a measurement of option prices and basically what that means is that when implied volatility is really high that is just telling us that option prices are really juicy and they're more expensive as compared to when implied volatility is low implied volatility quite literally is basically the stock market or a specific stocks expected future volatility as suggested by the option prices so when option prices are really expensive that means there's a lot of demand for buying options whether it's for speculation or for hedging purposes and when the options are really expensive that just means that the market is pricing in a lot of expected volatility going forward and when option prices are really cheap that means options markets are pricing in less volatility for that stock going forward the VIX Index specifically measures 30-day option prices on the S&P 500 Index but it is also a good gauge for market-wide implied volatility or option price expensiveness if we go back to earlier this year in 23 we can see the VIX Index was around 30 and this is indicative of high option prices or higher option prices I should say as compared to this lower point in time when the VIX Index was in the low teens High implied volatility typically coincides with big downside movements in a in a specific stock or market and the benefits of selling put options when implied volatility is high is number one that means we are typically selling puts into a downside movement and so if you're doing so and expecting a bounce in the stock price then that gives you a potentially really good entry point but it could also work against you if you sell the put options too soon and the stock price keeps declining then obviously um that gives you a lot of exposure to the downside when you're selling put options number two is that you can sell further out of- the money strike prices as I mentioned briefly before so when option prices are more expensive implied volatility is high since the market is expecting a lot of volatility from the stock going forward this allows us to sell a put option further below the strike price as compared to when implied volatility is low and we have to sell options with strike prices much closer to the stock price to collect decent amounts of Premium the third benefit and perhaps the biggest benefit of selling put options when implied volatility is high into a downside movement is that a subsequent rally in the stock price will crush the put option price from the combination of the stock price increase and the implied volatility decrease so generally speaking if a stock price increases put option prices will go down without any change in time and without any change in implied volatility however when we have an increase in the stock price we typically will see a decrease in implied volatility especially for put options and that just means that as the stock price is rising we see less demand for downside protection in the form of put buying and the combination of these two things will decimate a put options price we saw a really good example of this in July 2023 when Amazon stock price went from below $130 to $142 and this short putut positions p&l went from zero to basically 100% of the maximum profit potential and that's because this put price essentially went to zero in just a couple of days from the combination of the stock price going up and implied volatility dropping off a cliff I'm only going to show the cumulative performance here but if you want to see graphs of each individual ual trades performance please check the link in the description below where you can download an entire PDF of this presentation in addition to getting my options trading for beginners PDF which is over 170 pages long covering the Core Concepts that you need to understand as a beginner in addition to a library of the popular strategies how they work and how they're set up with specific examples of when they made and lost money if you love The analysis in this video and you want more content just like this check the link in the description below for datadriven option strategies I've been spending countless hours doing the research and creating the content for this course and I'm really happy with how it's coming together and the response has been overwhelmingly positive