Want to buy and hold a company but think it's a little too expensive right now? Sell a put, and make risk-free return while you wait.
Want to sell that tech stock you've been holding once it doubles? Forget your limit order, that's for the boomers over at vanguard. Sell a call today!
For example say you think Meta is a buy at $90. But Meta is trading at 109.57, so sell a put with a strike of $90 and collect a premium in return for agreeing to purchase a stock at $90. If the stock hits 90 or below the contract will be executed and you will purchase the shares at $90 (same as you were going to do with a limit order).
If it doesn't hit 90, you still pocket the premium.
It's like getting paid for having a limit order.
It's getting paid for taking on risk. A limit order will execute at your level or better, not worse.
There's too much detail to cover in a short comment, but the main risks with a strategy like this is that the price drops well below your strike price and you're forced to buy the stock at higher price than the current market value. For cash-secured puts, you'll also need enough cash in your account to cover the purchase of the stock at your strike price. That said, depending on your mindset and goals, this can be a way to generate income while waiting for the right price.
The opposite side of this also applies for exiting positions. You can sell calls on a stock you own (covered calls) to collect a premium while you wait for the price to reach your chosen strike price. The risk being the potential that the price blows past your strike price, your shares get called away, and you don't get to profit from the extra gains above the strike.
If the strike is hit, you've bought in at what you believed was a reasonable price at the time of your contract creation. You may technically show a "loss," but you're getting something you wanted at the price you wanted.
If you buy a put instead you're effectively saying you strongly believe that the stock will fall to $x, and in this case, the fall to x will generate more money than the cost of the premium.
The second scenario is hard to get right because the option already has the statistical behavior of the stock priced into the premium. Your knowledge needs to be better than the collective knowledge of the market to make this viable
Investment banks usually trade in volatility space, also called delta hedged. Main idea they would sell options (calls or puts) by adding extra premium to the fair price. At the same time they make the whole portfolio delta neutral by buying and selling underlying instruments on daily basis. By having significant portfolio one could expect to leak less on the hedging process and may be use some correlation between underlyings and use index futures instead of individual stocks. The whole business is to capture the premium mentioned above without predicting up or down move.
This is not risk free:)
In your scenario you can either buy the stock at your entry price, call it $100
If you sell a put with a strike of $100 then you do get paid a premium, say $1, for that but if the stock closes at say $80 then you have locked in a loss, there is no risk free return happening in this scenario.
You can try and trade your way out of this but if the stock starts to move against you it will cost you more than you got paid to buy back the put.
There is nothing risk free going on here:)
Especially Cash secured puts.
The moment you write the put, you are explicitly stating when you buy the stock, if the put ends in the money, as dictated by the expiry.
And if the stock dips far below that amount by the expiry then you have alot of downside that you wouldn't have had if you didn't write the put.
Nothing is free, you write a put and the stock goes down you end up owning the stock that you are ownings at a loss from day one.