Can you realize a profit by "canceling" the insurance on puts?

Question

If you buy a protective put, you can “cancel” your insurance policy by selling your put. Is it possible for you to cancel your insurance and realize a profit?

Answer 1

It is absolutely possible to sell a put you previously purchased for more than you paid for it, thereby realizing a profit.

However, you should be aware that if you bought a protective put you will probably have a loss on the underlying which is greater than your profit on the put.

Example:

You bought 100 shares of a stock that is trading at $50 per share and you bought a protective put with a strike price of $50 for $5 per share. The stock drops to $40 and you sell the put option for $12.

You have a realized profit of $700 ($7 per share) on the put option, but you  have an unrealized loss of $1,000 ($10 per share) on the stock.

Also so not forget that it is possible to lose money on both the underlying and the protective put.

Example:

Assuming you buy the same stock and option as in the prevous example and you hold the option until expiration, at which time the stock is selling for $48 per share. That would make the option worth $2 per share, so you would have a $300 loss on the option and a $200 loss on the stock.

Answer 2

That's how a lot of us make a profit!  We do the same with calls.