It's fantastic that you're looking to explore selling puts on E*TRADE! This strategy can be a powerful tool for generating income or acquiring shares of companies you like at a discount. However, like all options strategies, it comes with its own set of risks. This comprehensive guide will walk you through the process step-by-step.
The Power of Selling Puts: An Introduction
Before we dive into the "how-to," let's quickly understand what selling a put option means. When you sell a put option, you are essentially entering into a contract where you agree to buy 100 shares of a specific underlying stock at a predetermined price (called the strike price) on or before a certain date (the expiration date). In exchange for taking on this obligation, you receive an immediate payment, known as the premium.
Think of it as setting a "buy order" for a stock you'd like to own, but instead of simply waiting for the price to drop, you get paid for your willingness to buy it at that lower price.
There are two main types of put selling:
Cash-Secured Puts: This is generally recommended for beginners. With cash-secured puts, you have enough cash in your account to cover the cost of buying the 100 shares if the put option is exercised. This limits your risk to the initial cash set aside.
Naked Puts (or Uncovered Puts): This is a more advanced strategy. With naked puts, you do not have the cash or underlying shares to cover the potential purchase obligation. This means your potential losses are theoretically unlimited, as the stock could drop to zero, and you'd still be obligated to buy it at the strike price. E*TRADE typically requires a higher options approval level and a margin account for naked put selling.
For this guide, we'll primarily focus on the safer, more accessible cash-secured put strategy, while acknowledging the existence of naked puts and their associated risks.
Step 1: Are You Ready? Assess Your Eligibility and Understand the Risks
Before you even think about clicking "sell," it's crucial to ensure you're eligible to trade options on E*TRADE and that you fully understand the risks involved.
1.1 Do You Have an E*TRADE Account?
If not, open one: Head over to E*TRADE's website and follow the steps to open a brokerage account. You'll need to provide personal information, financial details, and likely link a bank account.
If you do, proceed to the next step.
1.2 Get Options Approved!
E*TRADE, like most brokers, requires you to apply for and be approved for options trading. They have different "levels" of options approval based on your experience, financial situation, and risk tolerance.
Access the application: Log in to your E*TRADE account. Navigate to the "Accounts" or "Profile" section, and look for an option to apply for options trading.
Answer the questions honestly: The application will ask about your investing experience, financial net worth, liquid net worth, income, and investment objectives (e.g., income, growth, speculation, capital preservation). Be honest in your responses, as this helps E*TRADE determine your appropriate options trading level.
Understand the Levels:
Level 1: Covered Calls and Cash-Secured Puts. This is where you'll typically start and is sufficient for selling cash-secured puts.
Higher Levels: Allow for more complex strategies like spreads (Level 3) and naked options (Level 4), which carry higher risk.
Approval Process: E*TRADE will review your application. Approval can be quick (minutes) or take a few business days. You'll receive a notification once a decision is made.
1.3 Comprehend the Risks of Selling Puts
It cannot be stressed enough: options trading involves significant risk, and you can lose more than your initial investment, especially with certain strategies.
Obligation to Buy: The primary risk of selling a put is the obligation to buy the underlying stock at the strike price if the option is exercised by the buyer. If the stock price falls significantly below your strike price, you will be forced to buy shares at a price higher than the current market value, leading to an immediate unrealized loss.
Opportunity Cost: If the stock price soars past your strike price, you keep the premium, but you miss out on the potential upside of owning the stock at a lower price.
Early Assignment: While rare for out-of-the-money puts, a put option can be exercised early. This means you could be assigned the shares before expiration.
Liquidity Risk: For thinly traded options, it might be difficult to close your position at a favorable price if needed.
Commission and Fees: Remember that E*TRADE charges a per-contract fee for options trades (currently $0.65 per contract, or $0.50 if you make 30+ trades per quarter). These fees can eat into your profits, especially on smaller premiums.
Step 2: Research and Select Your Underlying Asset
Now that you're approved, it's time for the exciting part: finding a stock you'd be willing to own!
2.1 Identify Potential Candidates
Focus on Quality Companies: When selling puts, you're essentially expressing a willingness to buy a company's shares. Therefore, choose companies you genuinely believe in for the long term. Look for strong fundamentals, a good track record, and a solid business model.
Utilize ETRADE's Research Tools:* E*TRADE offers a robust suite of research tools.
Power ETRADE Platform:* This advanced platform provides extensive charting, screening, and analysis tools.
Stock Screener: Filter stocks based on criteria like market cap, industry, valuation metrics, and more.
Analyst Reports: Review opinions from various financial analysts.
News and Fundamentals: Stay updated on company news, earnings reports, and key financial ratios.
Consider Market Conditions: While selling puts can be profitable in neutral to slightly bullish or even slightly bearish markets, extreme volatility can increase your risk of assignment.
2.2 Determine Your "Buy Price" (Strike Price)
This is perhaps the most crucial decision. The strike price is the price at which you are obligated to buy the stock.
Below Current Market Price (Out-of-the-Money or OTM): This is the most common approach for selling puts. You aim to get assigned the stock at a price lower than where it's currently trading. The further out-of-the-money you go, the lower the premium you'll receive, but also the lower the probability of assignment.
At Current Market Price (At-the-Money or ATM): You'll receive a higher premium, but the probability of assignment is much higher.
Above Current Market Price (In-the-Money or ITM): Selling ITM puts means you are almost guaranteed to be assigned. This is less common for generating income and more for acquiring shares immediately.
Think about the price at which you'd be happy to buy 100 shares of this company anyway. If the stock is at $100, and you'd love to own it at $95, then a $95 strike price might be a good starting point.
2.3 Choose an Expiration Date
Options have a finite lifespan. You'll need to select an expiration date that aligns with your market outlook and how long you're willing to tie up your capital.
Short-Term (Weekly/Monthly): Offers smaller premiums but allows for more frequent trading and capital rotation. Higher time decay benefits sellers.
Longer-Term (Several Months Out): Offers larger premiums but ties up your capital for longer and exposes you to more potential price fluctuations. Time decay is slower.
A common strategy for beginners is to start with monthly expirations that are 30-60 days out. This provides a balance between premium collection and time for the trade to play out.
Step 3: Placing Your Sell Put Order on E*TRADE
Once you've done your research and decided on the stock, strike price, and expiration, it's time to place the order. ETRADE offers a user-friendly interface, especially on their Power ETRADE platform.
3.1 Navigate to the Options Chain
Log in to your E*TRADE account.
Go to the "Trade" tab.
Select "Options" or "Options Chain."
Enter the ticker symbol of the underlying stock you've chosen.
3.2 Select Your Put Option
The options chain will display a list of available call and put options for various strike prices and expiration dates.
Locate the expiration date you selected.
Find the strike price you determined.
Under the "Puts" side of the chain, locate the bid price for your chosen strike and expiration. You will be selling at the bid price.
Click on the bid price for the specific put option you wish to sell. This will populate an order ticket.
3.3 Configure the Order Ticket
The order ticket is where you'll specify the details of your trade.
Action: It should automatically be set to "Sell to Open."
Quantity: Options contracts represent 100 shares. So, if you want to sell one contract, the quantity will be "1." If you want to sell two, it's "2," and so on.
Order Type:
Limit Order (Recommended): This allows you to specify the exact premium you want to receive. If the market moves unfavorably, your order might not fill, but you avoid getting a worse price than intended.
Market Order (Use with Caution): This will fill your order immediately at the best available price. For options, this can lead to unexpected fills due to bid-ask spread fluctuations.
Limit Price: If you selected a limit order, enter the premium you wish to receive per contract. The current bid price is a good starting point.
Time in Force:
Day: The order is active only for the current trading day.
Good 'til Canceled (GTC): The order remains active until it's filled or you cancel it (typically up to 60 days).
Review Order: Always click "Review Order" to double-check all the details before submitting.
3.4 Confirm and Place Order
After reviewing, click "Place Order" or "Submit Order."
You'll typically receive a confirmation that your order has been placed. You can monitor its status in your "Orders" or "Activity" tab.
Step 4: Monitoring Your Position and Managing Outcomes
Congratulations! You've sold a put option. Now, the waiting game begins. It's crucial to monitor your position and have a plan for different scenarios.
4.1 Monitor the Stock Price
Keep an eye on the underlying stock's price relative to your strike price.
E*TRADE's portfolio view or watchlists are excellent for tracking your positions.
4.2 Potential Outcomes at Expiration
Scenario 1: Stock Price Stays Above Strike Price
The Put Expires Worthless: This is the ideal outcome for the seller. The option expires unexercised, and you get to keep the entire premium you received. Your obligation to buy the shares simply disappears. This is your maximum profit scenario.
Scenario 2: Stock Price Falls Below Strike Price
You Are Assigned the Shares: If the stock price is below your strike price at expiration, the buyer of the put option will likely exercise their right to sell you the shares. You will be obligated to buy 100 shares per contract at your strike price. The cash you "secured" for the put will be used for this purchase.
Your Cost Basis: Your effective purchase price for the shares will be the strike price minus the premium you received per share. For example, if you sold a $50 put for $2.00 premium and were assigned, your effective cost basis is $48 per share ($50 - $2.00).
4.3 Managing Your Position Before Expiration
You don't have to wait until expiration. You can actively manage your put option:
Close for a Profit: If the stock price rises and the put option loses value (meaning it becomes cheaper to buy back), you can "Buy to Close" the option for a profit. This locks in your gains without waiting for expiration. This is often preferred to avoid assignment.
Roll the Option: If the stock price is getting close to your strike, or you want to extend your timeframe, you can "roll" the option. This involves:
Buying to Close your existing put option.
Selling to Open a new put option with a later expiration date, often at the same or a different strike price. You might do this to collect more premium, or to give the stock more time to recover above your strike.
Take Assignment: If you're happy to own the stock at the strike price, you can simply let the put get assigned. This is often part of the strategy if you truly want to acquire the shares at a specific price.
Manage Losses: If the stock price is dropping significantly and you don't want to be assigned, or you want to limit your potential losses, you can "Buy to Close" the put option. This might result in a loss if you buy it back for more than you sold it for, but it caps your downside compared to taking assignment on a rapidly falling stock.
Step 5: Post-Assignment (If Applicable)
If you are assigned the shares, they will appear in your E*TRADE account.
5.1 Review Your New Position
You'll now own 100 shares of the underlying stock (per contract assigned) at your effective cost basis.
You can then decide to hold the shares for the long term, sell them immediately, or even sell covered calls against them to generate further income.
5.2 Remember Your Goals
Did you sell the put to acquire shares at a discount? Then congratulations, you achieved your goal!
Did you sell it primarily for income? If assigned, consider if you still like the company and if holding the shares aligns with your investment strategy.
E*TRADE Specifics & Tips
Power ETRADE is Your Friend:* If you're serious about options, familiarize yourself with the Power E*TRADE platform. It offers advanced tools, customizable layouts, and faster order entry.
Paper Trading: E*TRADE often provides a paper trading (simulated) account. Practice selling puts there first to get comfortable with the platform and the mechanics without risking real money.
Education Resources: E*TRADE has a wealth of educational materials, articles, and videos on options trading. Utilize these resources to deepen your understanding.
Customer Service: Don't hesitate to contact E*TRADE's options specialists if you have questions or encounter issues.
10 Related FAQ Questions:
How to choose the right strike price when selling puts?
Quick Answer: Choose a strike price that represents a price at which you would genuinely be happy to own the underlying stock. For income generation, out-of-the-money (OTM) strikes (below the current market price) are common.
How to decide on the best expiration date for selling puts?
Quick Answer: Consider your market outlook and desired frequency of premium collection. Shorter expirations (30-60 days) often offer a good balance of premium and time decay, while longer expirations yield more premium but tie up capital longer.
How to calculate the potential profit from selling a put option?
Quick Answer: The maximum profit from selling a single put option is the premium received, minus commissions and fees. This profit is realized if the option expires worthless.
How to calculate the breakeven point for a sold put option?
Quick Answer: The breakeven point for a sold put is the strike price minus the premium received. For example, if you sell a $50 put for $2.00, your breakeven is $48 ($50 - $2).
How to close a put option position on E*TRADE?
Quick Answer: To close a sold put, you would place a "Buy to Close" order for the same option contract. Go to your positions, click on the put option, and select "Buy to Close."
How to roll a put option on E*TRADE?
Quick Answer: Rolling a put involves simultaneously "Buying to Close" your existing put and "Selling to Open" a new put with a different strike and/or expiration date. E*TRADE's platform often has a "Roll" function for this.
How to avoid assignment when selling puts?
Quick Answer: To avoid assignment, you must close your put option position (by "Buying to Close") before the expiration date, especially if the stock price is below or very close to your strike price.
How to get a higher options approval level on E*TRADE?
Quick Answer: To get a higher options approval level, you generally need to demonstrate more trading experience, a higher net worth, and a greater understanding of options risks, typically by updating your financial profile in your E*TRADE account and reapplying.
How to understand if selling puts is right for my investment goals?
Quick Answer: Selling puts is generally suitable if you are bullish or neutral on a stock and are willing to potentially own it at a specific lower price, or if your primary goal is to generate income from premiums. It's not for highly risk-averse investors.
How to learn more about options trading on E*TRADE?
Quick Answer: Utilize E*TRADE's extensive educational resources, including their "Knowledge Center," webinars, and paper trading platform. Consider taking online courses or reading reputable books on options.
