Are you ready to dive into the world of options trading on Charles Schwab? Trading options, particularly placing put options, can be a powerful tool for speculating on downward price movements or for generating income. However, it's crucial to understand the process thoroughly, as options trading carries significant risks. This comprehensive guide will walk you through everything you need to know about placing a put on Charles Schwab, from initial setup to execution.
Let's get started on your journey to becoming a more informed options trader!
Understanding the Basics of a Put Option
Before we jump into the "how-to," let's quickly clarify what a put option is.
A put option gives the buyer the right, but not the obligation, to sell an underlying asset (like a stock) at a specified price (the strike price) on or before a specific date (the expiration date).
Conversely, if you are selling a put option (also known as "writing" a put), you are granting that right to someone else and taking on the obligation to buy the underlying asset at the strike price if the option is exercised by the buyer.
When would you consider buying a put? You'd typically buy a put if you expect the price of the underlying asset to decrease.
When would you consider selling a put? You might sell a put if you are neutral to bullish on the underlying asset and either want to generate income (the premium received) or are willing to buy the stock at a lower price if it falls.
Tip: Revisit this page tomorrow to reinforce memory.
Now, let's move on to the practical steps on Charles Schwab.
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| How To Place A Put On Charles Schwab |
Step 1: Ensure Your Charles Schwab Account is Approved for Options Trading
This is the most crucial initial step. You cannot trade options on Charles Schwab without prior approval. Options trading involves varying levels of risk, and Schwab requires you to demonstrate a certain level of financial understanding and risk tolerance before granting access.
Sub-heading: Checking Your Current Approval Level
- Have you traded options before? If you have an existing Schwab account, you might already have some level of options approval.
- How to check:
- Log in to your Charles Schwab account online.
- Navigate to your "Profile" or "Service" section.
- Look for "Margin & Options" or a similar heading. Here, you'll see your current options approval level.
- Schwab has different options approval levels, typically ranging from Level 0 to Level 3, each allowing for progressively more complex strategies. For simply buying a put, Level 1 is usually sufficient (which allows for "Long Calls" and "Long Puts"). For selling a cash-secured put, Level 1 is also generally required. For more advanced strategies like spreads or uncovered puts, higher levels are needed.
Sub-heading: Applying for or Upgrading Options Approval
If you don't have the necessary approval, you'll need to apply.
- Online Application: Charles Schwab offers an online application process. This typically involves answering questions about your financial situation, trading experience, and investment objectives.
- What information will you need? Be prepared to provide details on:
- Your employment status and source of income.
- Your liquid net worth and total net worth.
- Your investment objectives (e.g., growth, income, speculation).
- Your trading experience with various financial instruments.
- Review and Consent: You'll be required to read and consent to various disclosures and agreements, including the "Characteristics and Risks of Standardized Options" document. It is imperative that you read and understand this document fully. Options are complex instruments, and this document outlines the associated risks.
- Processing Time: After submitting your application, Schwab typically reviews it within a few business days. You'll receive notification of your approval status via email or mail.
Step 2: Fund Your Account (If Necessary) and Choose Your Platform
Once you have the appropriate options approval, ensure you have sufficient funds in your account to cover the cost of the put option (if buying) or to secure the potential purchase of the underlying shares (if selling a cash-secured put).
Sub-heading: Understanding the Cost of a Put Option
- For Buyers: When you buy a put option, the cost is the premium you pay. This premium is paid upfront. For example, if a put option is trading at $2.50, and one contract represents 100 shares, your cost would be $2.50 * 100 = $250 (plus commissions). This is your maximum loss if the option expires worthless.
- For Sellers (Cash-Secured Puts): If you are selling a cash-secured put, you don't pay a premium; instead, you receive a premium. However, you must have enough cash in your account to cover the potential purchase of the shares if the option is assigned. For instance, if you sell a put with a strike price of $50, you need to have $5,000 (100 shares * $50 strike) set aside in your account. This cash will be "secured" or held by Schwab and won't be available for other investments until the option expires or is closed.
Sub-heading: Navigating Charles Schwab's Trading Platforms
Charles Schwab offers several platforms to place trades, each with its own strengths:
- Schwab.com: The primary website is user-friendly and great for most investors, including those new to options.
- Schwab Mobile App: Convenient for on-the-go trading and monitoring.
- thinkorswim® Desktop/Web/Mobile: A robust and advanced platform, inherited from TD Ameritrade, ideal for active traders and those who require sophisticated analysis tools, charting, and advanced order types. If you plan to delve deep into options strategies, thinkorswim is highly recommended.
For this guide, we'll primarily focus on the process using Schwab.com, as it's the most widely accessible. The steps are generally similar across platforms.
Tip: Review key points when done.
Step 3: Research and Select Your Put Option
This is where the analytical work begins! Choosing the right put option involves careful consideration of the underlying asset, strike price, and expiration date.
Sub-heading: Identifying the Underlying Security
- What stock or ETF do you want to place a put on? This is your first decision. You should have a clear bearish or neutral-to-bullish outlook on this specific asset.
- Example: Let's say you believe XYZ Corp. (XYZ), currently trading at $105, is likely to fall in price.
Sub-heading: Accessing the Options Chain
- On Schwab.com:
- Log in and go to "Trade" -> "All-In-One Trade Ticket."
- Enter the symbol of your underlying security (e.g., XYZ) in the "Symbol" field.
- Select "Options" under the "Product" dropdown.
- The options chain for XYZ will load, displaying various expiration dates, strike prices, and call/put options.
Sub-heading: Choosing the Expiration Date
The expiration date dictates how long you have for your price prediction to play out.
- Near-term vs. Long-term:
- Shorter-term expirations (e.g., weeks away) are cheaper but are highly sensitive to time decay (theta). This means the option's value erodes quickly as it approaches expiration.
- Longer-term expirations (e.g., months or LEAPS) are more expensive but give the underlying asset more time to move in your favor and are less susceptible to rapid time decay.
- Consider your outlook: If you expect a quick drop, a near-term option might be suitable. If you anticipate a gradual decline, a longer-term option could be better.
Sub-heading: Selecting the Strike Price
The strike price is where you believe the action will happen.
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For Buying a Put (Bearish Outlook):
- You want the stock price to fall below your chosen strike price.
- In-the-money (ITM) puts: Strike price is above the current stock price. These are more expensive but have intrinsic value and a higher delta (move more with the underlying).
- At-the-money (ATM) puts: Strike price is approximately the same as the current stock price. These have significant time value and a delta around -0.50.
- Out-of-the-money (OTM) puts: Strike price is below the current stock price. These are cheaper but purely consist of time value and have a lower delta. They require a larger price move to become profitable.
- Example: If XYZ is at $105, you might buy a $100 strike put (OTM), a $105 strike put (ATM), or a $110 strike put (ITM).
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For Selling a Put (Neutral to Bullish Outlook/Income Generation):
- You want the stock price to stay above your chosen strike price, so the option expires worthless and you keep the premium.
- You'll typically sell out-of-the-money (OTM) puts. This means the strike price is below the current stock price. You want the stock to stay above this price.
- Example: If XYZ is at $105, you might sell a $100 strike put, expecting XYZ to stay above $100.
Sub-heading: Analyzing Premiums, Bid/Ask, and Volume/Open Interest
- Premium (Last Price): This is the last price at which the option traded.
- Bid and Ask Prices: The bid is the highest price a buyer is willing to pay, and the ask is the lowest price a seller is willing to accept. The difference
(spread) indicates liquidity. A narrower spread is generally better. - Volume: The number of contracts traded today. Higher volume indicates more active trading.
- Open Interest: The total number of outstanding option contracts that have not yet been closed or exercised. High open interest suggests strong market interest.
- Look for options with decent volume and open interest to ensure you can easily enter and exit your position.
Step 4: Placing Your Put Option Order
Now that you've selected your desired put option, it's time to set up the order.
Sub-heading: Navigating the All-In-One Trade Ticket
- Once you've selected the underlying symbol and the "Options" product, the trade ticket will appear.
- For a single put option:
- Under "Strategy," typically select "Put."
- Under "Action," choose:
- "Buy to Open" if you are buying a new put option (you are bullish on the option, bearish on the underlying).
- "Sell to Open" if you are selling/writing a new put option (you are bearish on the option, neutral to bullish on the underlying).
Sub-heading: Specifying Contract Details
- Quantity: Enter the number of option contracts you wish to trade (each contract represents 100 shares of the underlying).
- Expiration Date: Select the expiration date you determined in Step 3.
- Strike Price: Select the strike price you determined in Step 3.
Sub-heading: Choosing Your Order Type
This is critical for how your order will be executed.
- Market Order: Executes immediately at the best available price. Not recommended for options due to potential for price slippage, especially with wider bid-ask spreads.
- Limit Order: Allows you to specify the maximum price you're willing to pay (if buying) or the minimum price you're willing to receive (if selling). This gives you control over your execution price. Highly recommended for options trading.
- Price: Enter your desired limit price. For buying a put, aim for a price closer to the bid or within the bid-ask spread. For selling a put, aim for a price closer to the ask or within the bid-ask spread.
- Stop Order / Stop Limit Order: More advanced order types used for risk management, often to close out a position if a certain price is hit. These are typically used for exiting trades, not usually for initiating a new put option (unless part of a complex strategy).
- Other Order Types: Schwab also offers various advanced order types like Trailing Stops, OCO (One-Cancels-Other), etc., which can be useful for managing your trades after they are placed.
Sub-heading: Setting Time in Force
This determines how long your order remains active.
Tip: Keep the flow, don’t jump randomly.
- Day: The order is active only for the current trading day. If not filled, it expires at market close.
- Good 'Til Canceled (GTC): The order remains active until it is filled or you manually cancel it (typically up to 60 days on Schwab). This is useful if you're waiting for a specific price.
- Other options: Schwab might offer specific time-in-force options like "Fill or Kill" (FOK) or "Immediate or Cancel" (IOC) for highly specific execution needs.
Step 5: Review and Place Your Order
This is your final check before submitting the trade.
Sub-heading: Carefully Review All Details
- Underlying Symbol: Is it the correct stock/ETF?
- Action: Is it "Buy to Open" or "Sell to Open"?
- Quantity: Is the number of contracts correct?
- Expiration Date: Is it the intended expiration?
- Strike Price: Is it the correct strike price?
- Order Type: Is it a limit order with your desired price?
- Time in Force: Is it "Day" or "GTC"?
- Estimated Cost/Proceeds: Schwab will provide an estimate of the maximum cost (for buying) or maximum proceeds (for selling). Double-check this!
- Commissions and Fees: Be aware of the commissions and fees. Charles Schwab charges $0.65 per contract for online options trades, with no base commission. Regulatory and exchange fees may also apply.
Sub-heading: Confirm and Place Order
- Once you are absolutely certain all details are correct, click the "Review Order" button.
- A confirmation screen will appear, reiterating all your order details and any associated risks.
- Read this screen carefully one last time.
- Finally, click "Place Order" to submit your trade.
Step 6: Monitor Your Order and Position
After placing your order, you'll need to monitor its status and, once filled, manage your position.
Sub-heading: Tracking Your Order Status
- Order Status: You can typically view the status of your order in the "Order Status" or "Trade History" section of your Schwab account.
- Filled or Partially Filled: Your order might be "Filled" (executed completely), "Partially Filled" (only a portion executed), or "Open" (waiting for execution).
- Canceled: If your order isn't filled by its time-in-force, or if you manually cancel it.
Sub-heading: Managing Your Put Option Position
- For Put Buyers:
- If the underlying stock falls below your strike price, your put option will increase in value. You can then sell to close your put option for a profit.
- If the stock stays above your strike price or rises, your put option will lose value. You might choose to sell to close it for a smaller loss to avoid losing the entire premium, or let it expire worthless.
- Exercise: If your put is in-the-money at expiration and you wish to sell the underlying shares at the strike price, you can exercise the option. However, for most retail traders, it's more common to sell the option itself for a profit before expiration.
- For Put Sellers (Cash-Secured Puts):
- If the underlying stock stays above your strike price, the put option will likely expire worthless, and you keep the entire premium you received. This is the desired outcome.
- If the stock falls below your strike price, you might be assigned the shares. This means you are obligated to buy 100 shares per contract at the strike price. The cash you "secured" will be used for this purchase. You would then own the stock at that price.
- You can also buy to close the put option before expiration to take profit (if the option's value has decreased) or to cut losses (if the option's value has increased against you).
Important Considerations and Risks
- Options are Complex: Options trading is not for beginners. Thoroughly educate yourself before trading.
- Risk of Loss: When buying puts, you can lose 100% of the premium paid. When selling puts, your maximum loss can be significant if the underlying stock drops substantially, as you are obligated to buy the shares at the strike price, which could be well above the market price at the time of assignment.
- Time Decay (Theta): Options lose value as they approach expiration. This is a significant factor, especially for options buyers.
- Volatility (Vega): Option prices are sensitive to changes in implied volatility.
- Leverage: Options offer leverage, meaning a small price movement in the underlying can lead to a large percentage gain or loss in the option's value.
- Early Assignment: While less common for long puts, short puts can be assigned at any time before expiration, especially if they are deep in-the-money.
- Commissions and Fees: Factor in Schwab's $0.65 per contract fee (plus regulatory fees) into your potential profits and losses.
10 Related FAQ Questions with Quick Answers
How to check my options approval level on Charles Schwab?
Log in to Schwab.com, go to "Profile" or "Service," then look for "Margin & Options" to see your current approval level.
How to apply for options trading approval on Charles Schwab?
You can apply online through your Schwab account by navigating to the "Margin & Options" section and following the application prompts, providing financial and experience details.
How to choose the right strike price for a put option?
For buying a put, consider how far you expect the stock to fall; OTM puts are cheaper but need a larger move, while ITM puts are more expensive but have intrinsic value. For selling a put, typically choose an OTM strike price below the current stock price that you are comfortable owning the stock at.
How to select the best expiration date for a put option?
Choose an expiration date that aligns with your market outlook. Shorter-term options have more time decay but are cheaper; longer-term options are more expensive but give more time for the trade to play out.
Tip: Don’t skip the details — they matter.
How to understand the premium of a put option?
The premium is the price you pay to buy a put (your maximum loss) or the income you receive when selling a put. It's influenced by the strike price, expiration date, volatility, and interest rates.
How to set a limit order when placing a put on Charles Schwab?
On the trade ticket, select "Limit" as the Order Type and then enter your desired price. This ensures your order is executed at your specified price or better.
How to monitor the status of my put option order on Charles Schwab?
After placing your order, check the "Order Status" or "Trade History" section of your Schwab account to see if it's filled, partially filled, or open.
How to close a put option position on Charles Schwab?
To close a put you bought, you would "Sell to Close." To close a put you sold, you would "Buy to Close." Both actions are done via the same trade ticket, selecting the appropriate action.
How to understand assignment risks when selling a put option?
When you sell a put, you are obligated to buy 100 shares per contract at the strike price if the option is assigned. This can happen if the stock price falls below the strike price. Ensure you have the cash available to cover this obligation.
How to learn more about options trading strategies on Charles Schwab?
Charles Schwab provides extensive educational resources, including articles, videos, and webcasts, on their website and the thinkorswim platform. Look for sections on "Options Education" or "Options Trading Strategies."
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