Bai Dao Options Mini-Class 07 | Buy the dip at your target price? Earn "rent" while you wait with "Short Puts"

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The stock you're "waiting to buy on discount"

Have fellow investors had this experience: You spot a stock you like, think it's great, but feel the current price is a bit high. You tell yourself, "If it drops to a certain price, I'll buy." So you place a limit order and wait day after day.

Actually, there's a smarter way to wait—While waiting, you can also collect some "rent". This is the fourth strategy we're discussing today:Short Put (also known as Sell Put). Even value investing giants like Warren Buffett and Duan Yongping have used it to "build positions at a discount while earning income." In this episode, we'll break it down completely.

What exactly does selling a put involve?

Let's recap the previous episodes: The buyer (Long) pays a premium to acquire rights, while the seller (Short) receives the premium and assumes obligations.

Selling a put option means you collect a premium (like rent) while committing to the counterparty: if the stock price falls to a certain level, you agree to buy the shares at that price.

Here's a more relatable analogy: Suppose you've been bullish on a stock for a while. It's currently trading at $50 per share, but you find it expensive and would prefer to wait until it drops to $45 before buying. Instead of just waiting passively, you could place a "limit buy order at $45." By making this commitment, you also receive an upfront payment:

If the stock price doesn't fall to $45 → You keep the premium as pure profit, without having to buy the shares or incur any loss;

If the stock price does fall to $45 → You buy the shares at the agreed-upon price ($45 was your target price anyway), and you still keep the premium.

To sum it up in one sentence regarding stocks:By collecting the premium, you effectively place a limit buy order at a price lower than the current market price, while receiving the interest (premium) in advance.

Let's crunch the numbers: What does "earning rent while waiting" look like?

Let's use Tesla (TSLA) as a hypothetical example (the figures below are set for educational purposes and do not reflect real-time prices).

Assuming TSLA's current price is around $450, and you believe it won't fall below $430. Even if it does drop to $430, you are happy to buy the shares. So yousell one put option with a strike price of $430, receiving a premium of $15, which equals $15 × 100 = $1,500 in income.。

There are three possible outcomes at expiration:

① The stock price stays above $430 (does not break down)

The counterparty will not exercise the option, and you keep the $1,500 premium securely. This is your best-case scenario—You don't have to buy the shares, and you've already made the money.

② The stock price falls to around $430 or below

You are obligated to fulfill the contract and buy 100 shares at $430. But don't forget you already received the $15 premium, so your actual cost basis is $430 − $15 = $415/shareIt's $35 cheaper than the original current price of $450. This is exactly the "discounted position building" you were looking for.

③ The stock price plunges to a very low level (e.g., $350)

You would still have to take delivery at $430, which means buying a stock worth only $350 for $430. Including the premium received, the loss per share is approximately $65, resulting in a floating loss of about $6,500 per contract.

Is that clear?The profit from selling put options is limited (capped at the premium received), but if the stock price drops sharply, you may be forced to "catch the falling knife," leading to potentially significant losses. So, its iron rule is:Only use it on quality stocks that you are genuinely willing to hold even if the price drops, and set the strike price at a level where you are truly comfortable buying.

Do not confuse it with "buying puts," and make sure to keep sufficient cash reserves.

Beginners often confuse Short Put (selling puts) with Long Put (buying puts, discussed in Issue 05). Remember this one sentence:

Buying PutsPaying for the right to "profit from a drop" isa bearish/hedging strategy,profiting from a sharp decline in stock price;

Selling put options: Receiving payment in exchange for the obligation to "buy the shares if they drop" isa bullish or neutral (range-bound) strategy,earning premium income as long as the stock price does not fall.

One bets on a decline, the other bets on "no significant drop," representing completely opposite directions.

Warren Buffett used this tactic: In 1993, when Coca-Cola was trading around $40, he sold a large volume of Coca-Cola put options and collected approximately $7.5 million in premiums. His calculation was simple—if the price didn't drop to the strike price, he would keep the premium; if it did, he would buy Coca-Cola at his desired price.He was comfortable with either outcome.。

It should be clarified that Buffett is not a high-frequency options trader; this is merely an extension of his value investment discipline.Duan Yongping, a figure familiar to domestic investors, has also publicly shared similar ideas—he has repeatedly mentioned using the strategy of selling put options to wait for quality companies to reach his target 'discounted' price for entry.This is the healthiest way to use sold puts: treat them as a 'disciplined tool for buying at a discount,' rather than chaotically taking delivery of stocks you don't even want just for the sake of the premium.

Additionally, a special reminder: selling put options requires margin. Being forced to take delivery during a sharp decline can also result in losses; it is not 'risk-free income.' Moreover,it is best to keep sufficient cash in your account—once the stock price truly falls to the strike price and you are assigned, you must put up real money equivalent to 'Strike Price × 100 shares' per contract (in the example above, $430 × 100 = $43,000).

If you lack sufficient cash and cannot handle a margin call, your position may be forcibly liquidated, resulting in passive selling at the bottom and actual losses. Therefore, before executing, calculate clearly: if assigned, can I afford this payment?

Key takeaway

Selling Puts = Collecting Premium + Commitment to 'Take Delivery if Price Drops to a Certain Level', essentially a low-price limit buy order with added interest;

ShouyiLimited(which is the option premium), when the stock price plunges, you need toBeing assigned shares passively, which could lead to significant losses;

The right mindset:Bullish or expecting consolidation, and genuinely willing to take delivery at the strike price and hold long-term；

Don't confuse this with "buying puts": one bets on "no major drop" to collect premium (like rent), while the other bets on a "major drop" to profit;

It's best to keep sufficient cash on hand, otherwise you may face the risk of forced liquidation.

Want to experience the feeling of "selling puts to collect rent"? Open Futubull → Stocks → Options → Option Chain, find a quality stock you already want to hold long-term, and see how much premium you can collect from its out-of-the-money puts (those with strike prices below the current price). Get a feel for the logic of "waiting for a discount while earning interest."

A reminder: Selling puts requires margin. If the price drops sharply, you may be passively assigned shares; it is not "risk-free rent." For fellow investors who don't want to risk real money right away, it is strongly recommended to first use Futubull's "Paper Trading" feature. Use virtual funds to walk through the entire process of selling puts, being assigned shares, and settlement upon expiration. Once you are proficient, then trade with real capital. Remember:Only sell puts on stocks you are genuinely willing to hold, at prices you are truly willing to buy, and ensure you have sufficient cash reserved.

Want to gain more insight into the practical strategies of option sellers?We also have a "Futu Options Movement Bull" account, where we share daily trends and case studies on seller strategies. Fellow investors interested in "income-generating strategies" like selling puts and selling calls are welcome to follow along and sharpen their market eye.

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Disclaimer

This content does not constitute an offer, solicitation, recommendation, advice, opinion, or any form of guarantee regarding any securities, financial products, or instruments. Trading options carries substantial risk of loss. In certain scenarios, your losses may exceed the initial margin deposit. Even if you set contingency instructions such as 'stop-loss' or 'limit orders,' these may not necessarily prevent losses, as market conditions could render such instructions unexecutable. You may be required to deposit additional margin on short notice. If you fail to meet the margin call within the specified timeframe, your open positions may be liquidated. Nevertheless, you remain fully liable for any resulting deficit in your account. Therefore, prior to trading options, you should thoroughly study and understand options trading and carefully consider whether such trading aligns with your financial situation and investment objectives. If you do trade options, you must become familiar with the procedures, rights, and obligations associated with exercising options and their expiration.

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