Invest and Trade Profitably with Jon Johnson

In discussing selling puts, you stated that the upside was limited. What did you mean?

August 30, 2000

When selling puts, if the stock moves above the strike price of the put sold, the stock will not be put to you. If you are playing to take the gain on the premium, that is the best possible scenario as the put you sold expires worthless. No one is going to put a stock to you at a price that is higher than what they could buy the stock for in the market.

In that situation, you keep 100% of the premium you received for selling the put (less brokerage commissions). Your upside is limited in that your gain does not improve as the stock price continues to rise above the strike price of the put sold. Your maximum gain is set at the outset of the play. Still, a 20% to 35% gain (what we like to take in on our put spreads and put sales) in a few weeks is not chicken feed. Do that six months out of the year on your money, and you have a huge gain for the year. Do it twelve months out of the year, and you are contemplating whether you want to trade from the mountain getaway in Telluride or from the island bungalow in the tropics.

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