What stocks have had a 52-week low?
tastytrade logo
uploaded image

Apr 15, 2021

Long Stock vs. Short Put: Trading Lessons From An Engineer | tradeTALK Series

By:Jermal Chandler

Getting started in trading is never easy, however, regardless of your background you can learn to become an efficient and effective trader. The short put trade might serve as a great starting point. In this TradeTALK, Jermal Chandler explains how he got into self-directed investing, the basics of long stocks and short puts, and how you can decide which strategy is best for your goals.

Self-Directed Investing

When I was a newbie in the trading industry, I wanted to hear the sage advice of those who had been trading longer than myself. You see, I had limited knowledge because I left behind a life of laboratory work and scientific papers to pursue a career in trading. 

Why? Well it was my understanding that the generation before me was seemingly set up nicely for retirement. They would receive social security and payouts from company-sponsored pensions. So my desire to become a trader stemmed, in part, from the fact that I wanted to learn how to be a self-directed investor since retirement money seemed uncertain.

I became a trading assistant at a proprietary trading firm and was fortunate enough to learn from some of the best traders in the industry. The learning program consisted of options theory courses, real-time portfolio trading and discussions with experienced traders. These mentors can inspire confidence and also inject their own fears into a young trader’s mind. 

One of the prevailing schools of thought from the senior traders at the time was “under no circumstances should you ever sell a put naked”.

Where did this come from? Why such fear-mongering over a simple trade? Well, in some respects, it goes back to the stock market crash of 1987. The harrowing experience of a steep decline in U.S. stock prices over the course of a few days in October 1987 clearly scared the bejesus out of the men and women who lived through it. 

I must say that the fears were not unwarranted. Once I sat on a trading desk and managed a volatility portfolio during the 2008 Global Financial Crisis, I immediately understood all of their concerns. When you see the market capitalization of once-venerable companies like the former Bear Stearns vanquish right before your eyes, trust me, you get it.

Becoming A Contrarian: New Way of Thinking

After years of trading professionally, I eventually found myself teaching the principles of option trading to those who wanted to become more active with their own investments. To my surprise, while often discussing the risks and rewards associated with option strategies, I began to re-formulate my thinking around several strategies. In particular, I realized that my old friend, the short put trade, was not such a terrible idea in certain situations.

The strategy is a prime candidate to test the Tastytrade tenets:

  1. Markets are random

  2. Law of large numbers

  3. Selling premium

  4. Managing winning trades

Since it’s impossible to know what the market it’s going to do it’s best to trade small and often. Data shows that selling premium can have a higher probability of profit than buying premium over time. However, it is perhaps most important to manage winning trades before they get away from you.

Let’s compare the short put trade to getting long stock.

Getting Long Stock

The majority of investors look to purchase stock when they are bullish on a company because it’s fairly straightforward. You can buy shares at the current price with the hope that they appreciate in value.

The benefits of buying stock are unlimited upside exposure and the ability to collect dividends. As far as drawbacks, the only way to make money on a long stock trade is for shares to appreciate in price. Additionally, the cost to purchase 100 shares of stock in many equities can tie up lots of investment dollars thus making it capital intensive.

For example, let’s say we want to buy shares of Advanced Micro Devices (AMD). In order to purchase 100 shares of stock at $85.72, we must put up $8,572 for that transaction. While this trade has unlimited upside profit potential it is very capital intensive. Additionally, AMD does not distribute a dividend.

Buying AMD stock is a perfectly suitable strategy for being bullish since the risk/reward is rather simple. Although, when you analyze it from a probability standpoint, you have roughly a 50% chance of making a profit on long stock. 

You can only win in one direction, which is stock moving upwards.

The Short Put Trade

Another way to express a bullish sentiment is to sell a put option with the hope that the stock rises. At expiration if the stock is above the put strike, then the option expires worthless and the seller gets to keep the premium.

There are several benefits to the short put trade. Depending on the chosen strike price, you could potentially purchase stock at a lower price should you get assigned at expiration. It is a long theta trade and thus will benefit from the rate of decay of an option. Finally, this trade has the ability to be successful if the stock goes up, remains flat or trades down slightly. A multiple win scenario is a nice added feature.

However, the short put trade does have two drawbacks. The maximum profit potential is limited to the premium received at the outset of the trade. On top of that, it is not possible to collect a dividend by selling a put.

Let’s say we decide to sell one contact of the AMD 82.5-strike put for $5 in premium. Our expiration breakeven, which is the put strike minus the premium, equates to stock trading $77.50. Below that the trade loses money.

We could potentially be obligated to purchase 100 shares if AMD is trading below our strike price at expiration but luckily we already identified $82.50 as a place where we are comfortable buying shares. Not to mention that by collecting $500 in premium we would receive a discount of sorts to purchase stock should we be assigned. 

If the stock is trading above the 82.5-strike at expiration then the option expires worthless and we keep the premium. We can attempt the same trade again in another expiration.

This strategy can profit if AMD is trading $85 at expiration which is above the 82.5-strike. It can profit if AMD closes at $82.50 at expiration, and it can profit if AMD is below $85 but above $82.50. There are multiple ways to win on this trade.

On the flipside, we do have to be mindful of a maximum loss scenario. Once AMD is trading below our breakeven of $77.50 we begin to lose money on our short put trade. As the stock goes down further, our delta becomes more positive and our profit and loss profile begins to  mirror that of being long stock. We would lose the most money if AMD trades down to zero. 

Long Stock vs. Short Put: Which Is Better?

Long stock has unlimited upside profit potential at the expense of a lower probability of profit. Selling puts increases the probability of profit, improves cost basis but has limited profitability. Both are suitable strategies, but the right strategy depends on the trader’s assumption.

If you are bullish on a stock then you might be willing to sacrifice probabilities for a higher potential payout if your direction assumption is correct. If you want to collect premium and are content with the potential obligation to purchase stock at a lower price, then you might be comfortable selling puts.

Find out for yourself and see which works best for you. We have plenty of research regarding both strategies so head to for more information!

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Related Posts

tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on 

tastytrade is a trademark/servicemark owned by tastytrade.

tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”).

tastyworks, Inc. (“tastyworks”) has entered into a Marketing Agreement with tastytrade (“Marketing Agent”) whereby tastyworks pays compensation to Marketing Agent to recommend tastyworks’ brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastyworks. tastytrade is the parent company of tastyworks. tastyworks and Marketing Agent are separate entities with their own products and services. tastytrade has different privacy policies than tastyworks.

Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.

© copyright 2013 – 2022 tastytrade. All Rights Reserved. Applicable portions of the Terms of use on apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastytrade’s podcasts as necessary to view for personal use.