How to Sell Put Options on Questrade

Imagine a scenario where you not only make money when the market is going up, but you also profit when it's dropping or stagnating. This is the power of options trading, and more specifically, selling put options on Questrade. Selling put options can be an intriguing way to generate income by taking on the obligation to purchase stock at a potentially discounted price. If you've ever thought about selling puts but don’t know where to start, buckle up—this guide will break it down step-by-step.

Why Sell Put Options?

At its core, selling put options means that you are giving someone the right to sell you a stock at a certain price (the strike price) before the option expires. You, as the put seller, collect a premium for taking on this obligation. If the stock price stays above the strike price by the expiration date, the option expires worthless, and you pocket the premium. If it falls below the strike price, you might have to buy the stock, but it will likely be at a discounted rate when you factor in the premium you received.

Let's say a stock is trading at $50 per share. You might sell a put option with a strike price of $45 and collect a premium of $2 per share. If the stock stays above $45, you keep the $2 premium per share as pure profit. If it falls to $43, you still buy the stock but at an effective price of $43 minus the $2 premium, or $41. That's a 9% discount from the original $45 strike price!

The biggest risk comes if the stock plummets, but the goal is to sell puts on stocks you wouldn’t mind owning anyway. Selling puts can be a conservative strategy for investors who are comfortable with accumulating shares of quality stocks over the long term.

Step-by-Step Guide to Selling Put Options on Questrade

Now that you're convinced of the merits of selling puts, let’s walk through how to do it on Questrade.

1. Open and Fund Your Questrade Account

If you don't already have a Questrade account, you'll need to open one. Questrade offers a relatively low-cost platform for stock and options trading. You'll need to fund your account with enough money to cover the potential purchase of shares if you're assigned the option.

2. Get Approval for Options Trading

Before you can trade options on Questrade, you must apply for and receive approval for options trading. There are different levels of options trading, and selling put options usually requires a higher level of approval (Level 2 or higher), as it involves a greater degree of risk. Make sure your account is approved for the appropriate level.

3. Choose a Stock to Sell Put Options On

The next step is choosing a stock that you’d be comfortable buying at a lower price. Ideally, this should be a stock that you wouldn’t mind owning long-term. Look for stocks with strong fundamentals, solid growth potential, or those that are undervalued.

4. Pick the Right Strike Price and Expiration Date

Selling put options isn’t just about choosing any strike price or expiration date; it requires a bit of strategy. Generally, you want to choose a strike price below the current market price of the stock (often called out-of-the-money). This increases your chances of the option expiring worthless, allowing you to keep the premium.

The expiration date is also important. Options with shorter expirations tend to have higher time decay, meaning the value of the option decreases more rapidly. However, selling longer-term options can provide higher premiums but with greater risks.

5. Calculate the Potential Income and Risk

Before executing the trade, calculate how much you stand to gain and what your risk exposure is. For example, if you sell a put option with a $45 strike price and collect a $2 premium, your break-even point is $43 ($45 - $2). If the stock drops below that, you're technically at a loss. If it stays above $45, you keep the premium.

6. Place the Trade

Once you’ve chosen the strike price and expiration date, it’s time to place the trade. Here’s how to do it on Questrade:

• Log into your Questrade account.
• Navigate to the "Trading" section.
• Find the stock you want to sell the put on and click “Options.”
• Select the specific contract (strike price and expiration date).
• Choose the option type as “Sell to Open.”
• Enter the quantity (1 option = 100 shares) and the price at which you want to sell the option (you can sell at the market price or set a limit order).
• Review and confirm the order.

7. Monitor the Option

Once you've sold the put, it’s important to monitor its performance. If the stock price stays above the strike price, the option will expire worthless, and you’ll keep the premium. If it falls below, you might be assigned the stock. If you're assigned, you'll be required to purchase the shares at the strike price, but remember—you’ve already been paid the premium, so that’s a buffer against any losses.

8. Closing the Position Early (Optional)

If you’ve changed your mind or want to lock in profits early, you can close your position by buying back the put option before expiration. This would cancel out your obligation to buy the stock, though you may have to pay a small fee depending on how the option has moved.

Key Metrics to Watch When Selling Put Options

• Implied Volatility (IV): Higher IV typically means higher premiums, but also higher risks. Selling puts when volatility is elevated can lead to bigger profits, but stocks can swing wildly during such times.
• Open Interest and Volume: This shows how active the options market is for a particular stock and strike price. High open interest and volume mean there’s more liquidity, making it easier to get in and out of trades.
• Delta: This measures how much the option price will move for every $1 change in the stock price. A delta of -0.30, for example, means the option price will drop by $0.30 for every $1 increase in the stock price. Delta also gives you a sense of how likely the option is to expire worthless (delta closer to zero).

Common Pitfalls in Selling Put Options

• Underestimating Risk: Selling puts on high-flying stocks can seem like an easy win, but if the stock drops sharply, you could end up buying it at a much higher price than its current value.
• Not Having Enough Capital: Make sure you have enough cash in your account to cover the cost of buying 100 shares per option contract.
• Ignoring Expiration Dates: Keep an eye on the calendar. If you forget about an expiring option and it ends up in-the-money, you’ll be assigned the shares automatically.

Conclusion: The Art of Selling Puts on Questrade

Selling put options on Questrade is a powerful strategy for generating income and potentially acquiring stock at a lower price. However, it’s not without risk. By carefully selecting strike prices, monitoring market conditions, and managing your positions, you can use put-selling to enhance your portfolio's performance. If you’re new to options trading, consider starting with smaller trades and gradually building up as you gain experience and confidence.

This strategy, when executed with discipline, can offer both flexibility and financial reward. So why not give it a try on Questrade?