I was talking with a new options trader at a seminar recently. This fellow was seeing good returns on covered-call writing and looking to add another options strategy to his repertoire. When I suggested cash-secured put selling, he tensed up and waved a hand dismissively: "Nah, thanks. I can't wrap my mind around puts."

It's a funny fact but a true one: somehow calls are easier for investors to understand than puts.  My guess is that puts seem confusing, because our brains are typically geared towards the buying scenario: I buy stock, hoping it will go up, or I work with a call, which grants the right to buy stock.

What are puts, exactly?

Put options are basically the reverse of calls: a call gives you the right to buy stock, whereas a put gives you the right to sell stock. If you buy a put, you hold that right to sell at a given price for a certain time. If you sell a put, that means you're willing to buy stock from the put holder at that strike price, for a certain period of time. In exchange for that deal, you earn a premium.

Puts work backwards -- buying really means a willingness to sell, and selling one means you're ready to buy -- but they aren't impossible to understand. In fact, it pays to get to know how they work. Puts can help you protect profits in an existing position, generate income, or offer a less complicated alternative to short-selling.  Wrap your mind around puts -- it could be well worth it.

Naturally along with benefits, there are risks associated with trading puts.  My next posts will examine those as well.
 
Regards,

Brian (OG)

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.