Mastering Put Selling with a Small Account: Strategies and Tips for Traders Under $5,000
Selling put options is celebrated as one of the most advantageous and consistent strategies in options trading. With over 30 years of experience, expert trader Lee Lel emphasizes that putting options is his favorite method for building long-term wealth, and it can be effectively applied even with a modest account size—specifically, $5,000 or less.
At its core, selling a put option involves entering an agreement that obligates you to purchase a specific stock at a predetermined price (the strike price) before a certain expiration date. The key benefit is that you receive an upfront premium for taking on this obligation, effectively getting paid to potentially buy a stock you’re interested in at a price you control.
Lee Lel underscores that to generate wealth over time, investors need to participate in the stock market, either through long positions or indexes. Selling put options offers a straightforward and lucrative way for smaller accounts to get started, as it allows traders to define their purchase price and collect premiums regularly.
When you sell a put, you pick a stock that interests you and choose a strike price where you’re willing to buy it. Instead of buying at the current market price, you can choose a lower strike, giving you a margin of safety and a better entry point.
For example, if a stock trades at $27.42, you might want to purchase it at $21. By selling a put at the $21 strike price, someone pays you now for the right to sell the stock at $21 in the future. If the stock stays above the strike at expiration, you keep the premium and don’t have to buy the stock. If it falls below, you’re obligated to purchase the stock at $21, which might be below the current market value, allowing you to acquire quality shares at a cheaper price.
Lee Lel advocates for focusing on stocks you want to own and have researched thoroughly. He warns against blindly chasing stocks based on hearsay or tips from friends. Instead, he suggests selecting reputable, quality stocks with a bullish or stable trend and strong fundamentals.
He walks through several example stocks:
AT&T: Trading around $27.42, where a trader could sell a $21 strike put to collect premiums and potentially buy shares at a discount.
Bristol-Myers: Trading about $46.85, allowing the sale of puts at levels like $35, where premiums can be attractive, and the stock’s long-term support level is considered.
Palantir & Tesla: Even for higher-priced stocks like Palantir (~$123) or Tesla (~$339), traders can sell puts at lower strike prices—like $50 for Palantir or $50 for Tesla—and collect substantial premiums relative to the required margin.
How To Execute These Trades
The process is relatively straightforward:
Select a Stock and Strike Price: Ensure it’s a stock you’re comfortable owning at that level.
Check the Option Chain: Determine available expiration dates and current bid-ask spreads.
Decide on an Expiration: Longer durations provide more premium but also more market risk.
Set Your Premium: Usually selling at the middle of the bid-ask spread, e.g., $0.30 for a contract covering 100 shares, equating to $30 upfront.
Place the Trade: Use your brokerage platform's order entry to sell the put option.
Manage Your Position: You can buy back the option earlier if the market moves favorably, locking in profits or limiting losses.
Managing Margin and Capital Requirements
For traders with smaller accounts, understanding margin requirements is essential:
Margin Accounts: Brokers typically require only a fraction of the total risk—often around 20%. For example, a $21 strike put on an $2,100 stock position might require as little as $372 in margin.
Cash Secured Accounts: You must hold the full amount of $2,100 upfront, tying up more of your capital.
Lee Lel prefers margin accounts for their capital efficiency, enabling traders to leverage their funds while maintaining acceptable risk levels.
Evaluating Stock Options and Strategies
While many stocks are suitable candidates, Lee emphasizes the importance of selecting stocks on strong uptrends or at significant support levels. For instance, Bristol-Myers had support around $35, which could be a strategic strike point, offering a good balance between premium received and the risk of downside.
He also introduces the idea of annualized returns—by calculating returns over the period, traders can assess if the premiums justify holding the position, especially when factoring in margin requirements. For example, a $50 strike on Palantir might yield a ~17% annualized return if the stock remains above the strike at expiration.
Practical Resources for Stock Selection
Finding quality stocks suitable for put selling can be facilitated through several online tools:
CNBC and BarChart: Filter stocks by price and view their component lists, such as the Dow 30 or S&P 500.
Dividend Champions List (dripinvesting.org): Focuses on companies with a long history of dividend increases, signaling stability.
These resources help traders identify stocks under $50 or $60 that align with their risk tolerance and investment goals.
Final Considerations
Lee Lel underscores that successful put selling requires discipline, research, and a clear understanding of the stocks involved. He advises against selling puts on stocks you don’t want to own, to avoid getting caught in unfavorable market moves.
He encourages traders to use small, manageable positions, diversify across different stocks, and always be aware of their risk exposure, especially when working with limited capital.
Selling put options on stocks you are comfortable owning, combined with prudent management of premiums and margin requirements, allows traders with smaller accounts to participate in the stock market effectively. By focusing on high-quality stocks, selecting suitable strike prices, and managing trades carefully, investors can generate consistent income and build long-term wealth—even with less than $5,000.
For more information, Lee Lel advises visiting his website, smartoptionseller.com, where you can access free resources including ebooks, video series, and tools to deepen your understanding of options trading and enhance your strategies.
Part 1/10:
Mastering Put Selling with a Small Account: Strategies and Tips for Traders Under $5,000
Selling put options is celebrated as one of the most advantageous and consistent strategies in options trading. With over 30 years of experience, expert trader Lee Lel emphasizes that putting options is his favorite method for building long-term wealth, and it can be effectively applied even with a modest account size—specifically, $5,000 or less.
The Power of Selling Put Options
Part 2/10:
At its core, selling a put option involves entering an agreement that obligates you to purchase a specific stock at a predetermined price (the strike price) before a certain expiration date. The key benefit is that you receive an upfront premium for taking on this obligation, effectively getting paid to potentially buy a stock you’re interested in at a price you control.
Lee Lel underscores that to generate wealth over time, investors need to participate in the stock market, either through long positions or indexes. Selling put options offers a straightforward and lucrative way for smaller accounts to get started, as it allows traders to define their purchase price and collect premiums regularly.
How Does Selling Puts Work?
Part 3/10:
When you sell a put, you pick a stock that interests you and choose a strike price where you’re willing to buy it. Instead of buying at the current market price, you can choose a lower strike, giving you a margin of safety and a better entry point.
For example, if a stock trades at $27.42, you might want to purchase it at $21. By selling a put at the $21 strike price, someone pays you now for the right to sell the stock at $21 in the future. If the stock stays above the strike at expiration, you keep the premium and don’t have to buy the stock. If it falls below, you’re obligated to purchase the stock at $21, which might be below the current market value, allowing you to acquire quality shares at a cheaper price.
Choosing Stocks for Put Selling
Part 4/10:
Lee Lel advocates for focusing on stocks you want to own and have researched thoroughly. He warns against blindly chasing stocks based on hearsay or tips from friends. Instead, he suggests selecting reputable, quality stocks with a bullish or stable trend and strong fundamentals.
He walks through several example stocks:
AT&T: Trading around $27.42, where a trader could sell a $21 strike put to collect premiums and potentially buy shares at a discount.
Bristol-Myers: Trading about $46.85, allowing the sale of puts at levels like $35, where premiums can be attractive, and the stock’s long-term support level is considered.
Part 5/10:
How To Execute These Trades
The process is relatively straightforward:
Select a Stock and Strike Price: Ensure it’s a stock you’re comfortable owning at that level.
Check the Option Chain: Determine available expiration dates and current bid-ask spreads.
Decide on an Expiration: Longer durations provide more premium but also more market risk.
Set Your Premium: Usually selling at the middle of the bid-ask spread, e.g., $0.30 for a contract covering 100 shares, equating to $30 upfront.
Part 6/10:
Place the Trade: Use your brokerage platform's order entry to sell the put option.
Manage Your Position: You can buy back the option earlier if the market moves favorably, locking in profits or limiting losses.
Managing Margin and Capital Requirements
For traders with smaller accounts, understanding margin requirements is essential:
Margin Accounts: Brokers typically require only a fraction of the total risk—often around 20%. For example, a $21 strike put on an $2,100 stock position might require as little as $372 in margin.
Cash Secured Accounts: You must hold the full amount of $2,100 upfront, tying up more of your capital.
Part 7/10:
Lee Lel prefers margin accounts for their capital efficiency, enabling traders to leverage their funds while maintaining acceptable risk levels.
Evaluating Stock Options and Strategies
While many stocks are suitable candidates, Lee emphasizes the importance of selecting stocks on strong uptrends or at significant support levels. For instance, Bristol-Myers had support around $35, which could be a strategic strike point, offering a good balance between premium received and the risk of downside.
Part 8/10:
He also introduces the idea of annualized returns—by calculating returns over the period, traders can assess if the premiums justify holding the position, especially when factoring in margin requirements. For example, a $50 strike on Palantir might yield a ~17% annualized return if the stock remains above the strike at expiration.
Practical Resources for Stock Selection
Finding quality stocks suitable for put selling can be facilitated through several online tools:
CNBC and BarChart: Filter stocks by price and view their component lists, such as the Dow 30 or S&P 500.
Dividend Champions List (dripinvesting.org): Focuses on companies with a long history of dividend increases, signaling stability.
Part 9/10:
These resources help traders identify stocks under $50 or $60 that align with their risk tolerance and investment goals.
Final Considerations
Lee Lel underscores that successful put selling requires discipline, research, and a clear understanding of the stocks involved. He advises against selling puts on stocks you don’t want to own, to avoid getting caught in unfavorable market moves.
He encourages traders to use small, manageable positions, diversify across different stocks, and always be aware of their risk exposure, especially when working with limited capital.
Conclusion: Unlock Potential with Small Accounts
Part 10/10:
Selling put options on stocks you are comfortable owning, combined with prudent management of premiums and margin requirements, allows traders with smaller accounts to participate in the stock market effectively. By focusing on high-quality stocks, selecting suitable strike prices, and managing trades carefully, investors can generate consistent income and build long-term wealth—even with less than $5,000.
For more information, Lee Lel advises visiting his website, smartoptionseller.com, where you can access free resources including ebooks, video series, and tools to deepen your understanding of options trading and enhance your strategies.