Get Paid to Buy Your Favorite Stocks by Selling Puts
There is a wide misconception out there that naked options writing is “risky business” and strictly for gamblers. You can lose everything! Right? Wrong! When used properly, selling puts can enhance your yield while simultaneously increasing exposure to your favorite stock, commodity or ETF.
Selling naked put options allow you to fix your purchase price at a given price, called the strike price and also before a given expiry date. For example, if a stock is trading at $70 today, and you write a $65 put, you will pull in immediate cash for each 100 shares you own! That’s right, you are getting paid cash immediately for submitting a synthetic buy order.
Two things can happen on expiry date:
- Stock closes above $65, you get to keep the $200 cash and don’t have to purchase the stock! Repeat this process and write another put for more income.
- Stock drops below $65. This will trigger an option assignment, meaning you are obligated to purchase 100 shares of the stock at $65 a share. But, that’s okay, because you love the stock for the long term and planned to buy it anyway. You still keep the $200 premium, plus you’ve increased your overall portfolio investment and generated cash flow.
- If you want to purchase more shares, you can write more contracts and generate even more cash!
Selling puts to buy stocks:
We are going to assume as an investor you have a strong outlook for Apple in the next couple of years and think this is a great time to start increasing your ownership in your portfolio. Instead of buying 200 shares right away, you decide to buy at a cheaper price AND get paid for it!
- Apple is trading at $124.25 on April 3rd, 2015. You decide if the price drops to $122 you would like to purchase 200 shares.
- Each option contract gives you control over 100 shares, so you will need to write two contracts
- The April 17th $122 Puts are currently showing a last trade of $0.91
- You can look at Apple options prices for free on Yahoo Finance by clicking here
- This means if you sell two 122 puts you will collect $182 premium directly into your account ( $0.91 quote x 2 contracts x 100 shs per contract )
Two things can happen by expiry date:
- Stock drops below $122, you will have to purchase 200 shares at the fixed price of $122, even if the market price is cheaper. This is the only risk of the strategy, but this was your intention to begin with, to buy 200 shares at the fixed price.
- Stock stays above $122, you will not have to purchase any of the shares, and get to keep the premium of $182. The beauty is that you can go ahead and repeat the strategy over and over again, until you either purchase the shares or get tired of making money every two weeks.
The key to selling puts is to generate income while waiting to purchase the stock at a cheaper price. You will need to have the cash balance sitting in your account for your broker to allow you to write naked puts.
Selecting which strike prices to write, how far out to expiry and how to manage your risk throughout the life of the option are skills that we teach in depth in our options course!
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