Say I told you about a bullish options strategy offering a return of 10 to 20 percent in two months, as long as the underlying stock remains unchanged or moves higher. Well, you'd just have to buy it at a significant discount to its current price. You might be skeptical. Though buying puts is a bearish move, selling them implies the opposite.
Traders sell puts when they expect the underlying stock to rally.
If this happens, the contracts expire worthless, and the traders get to pocket the entire premium they received from the put buyer. To see how it works, and what happens if the share price declines instead of rising, let's examine a put-selling recommendation I made in The Option Advisor newsletter. The shares had just backed off a bit from a rally to all-time highs. If on May 16, the day these contracts expired, Merrill shares had risen, as a put seller I would pocket the full premium. This ability to make money on a modest decline as well as a rise is an attractive feature.