Trade: IBM currently at $153.40 Sell 1 IBM July 28 Expiration 150 Put at $2.00 (Short Put is 34 Delta and IV 22)
Analysis: Stock has been in a range over the last 12 months of 147.79 and 182.79. By selling the 150 Put at $2, you are committing to buy the stock at expiration at $148, if the stock is under $150.
You would be buying the stock at about the lows over the last 12 months. Because IBM Earnings are coming during the week of July 17, we get a little more premium than usual for selling a 21 Day Put that is about 3 ½ dollars out-of-the money.
The 34 Delta of the short put simply means that there is only a 34% probability we will be below $150 in IBM at expiration. What if you don’t want to buy the stock at expiration under $150 because of the big capital outlay of owning the stock?
Then I would just have an order in to buy the put back for $ 4 ½ if IBM has big down move. Since my credit is $2, I would be trying to limit my loss to not much more than I would of made.
Sell the Put
If I sell the put for $2 and IBM doesn’t go under $150 at expiration, I keep the entire credit. If IBM declines and I get out of the put at $4 ½, I limit my loss to 4 ½ minus my initial credit of $2 or $2 ½, not much more than my potential gain. That’s what we call Risk Management.