Sell a put option
You can sell the short put at any strike price. Many investors use the short put as an income-generating, proxy limit order and will often sell options at a price they believe is a key technical support level.
In this way, you essentially get paid to initiate a long equity position in the underlying security at a price you’d be happy to buy shares.
If the underlying security’s price is above the short put option’s strike price at expiration, the contract expires worthless, and you keep the premium received for selling the put.
You can repeat the process for as long as you wish and adjust the strike price up or down as your bias or market conditions change.
If the stock is below the strike price at expiration, you will be assigned 100 shares per contract at the strike price. However, the position’s cost basis is reduced by the net credit of any put options sold.
For example, if you sell a put with a $100 strike price and collect $5.00 of premium, your cost basis is $95 if you’re assigned stock.
Because you will buy 100 shares per contract if assigned, your account must have available funds to purchase 100 shares.
Selling a $100 strike put option requires you to have at least $10,000 in your account.
Rolling the short put can be an effective way to potentially delay assignment while collecting additional premium. The premium increases the profit if the stock’s price recovers, or lowers the net stock cost basis if assigned.