If the stock jumps from $50 to $60 during some time over the next 12 months before the option expiration, then obviously Jack won’t exercise his option to sell the shares to Jill for $45.
The stock is at $50, so Jack is not going to exercise his option, and it expires worthless.
The returns that can come from selling puts can vary substantially depending on what type of option trading you do.
The lower the strike price is compared to the current share price, the less likely it is that the option will be exercised, but the lower the premium will be.
For example, if Jack and Jill’s strike price was $50 instead of $45, then there would be a greater chance that Jill would end up owning the shares, because the stock only has to stay roughly flat or move downward a little bit for Jack to want to exercise the option. Out of all these scenarios, the only path I take is the last one: to occasionally sell puts due to wanting to own the stock at the strike price based on conservative valuation methods.
An enterprising investor can potentially sell a put option in a conservative way in order to deal with moderately overvalued markets. Receive dividend stock ideas and exclusive investing strategies with this dividend stock newsletter.
Top insider trading stocks