Sell PUTS to enter a stock position.
By selling a PUT short, you are in effect, selling a long put to someone else.
Think of selling puts the same way you would think of selling insurance.
Lets go over some assumptions.
The stock is trading at 20 dollars a share.
You sell the 15 strike put.
You sell it for 3 dollars.
It has 30 days to go before it expires.
Or in laymans terms if you prefer.
You wish to purchase XYZ stock at 15 dollars a share- however it is currently selling at 20. By selling the 15 strike put, you have just obligated yourself to purchase the stock if it falls to 15 dollars or less before it expires in 30 days.
On the opposite side of the trade:
Someone that either owns 100 shares of that same stock, or someone that is incredibly bearish has taken a bet against the stock. They believe that the stock might fall to 15 or less, and they are willing to pay you a 300 dollar premium for the insurance you just sold them in the form of a PUT.
If the stock does not fall below 15 dollars a share within 30 days, the PUT will expire worthless, and you will pocket the premium as profit.
At this point, if you still wish to own the stock at 15 dollars a share- you can enter in the same exact trade. In fact, you can do this every single month to create something that is akin to a passive revenue stream.
Always remember. If the stock does indeed go down to 15 or less before expiration, you are required to purchase the stock. Always keep the cash in your brokerage account in order to purchase the stock if it is put to you.
In a bearish market, when volitiity is high, you call sell insurance (PUTS) for rich premiums.
The alternative to doing this is to set a limit order and patiently wait for the stock price to hit you target price.
By selling PUTS you can earn cash while you wait for the stock to hit your entry price point.