Owning stocks; can’t get much more American than that. Some of the greatest fortunes in US history were earned thru stock appreciation.
Whether someone is a buy and hold investor, planning to hold onto the stock forever, or trading stocks for short term gain, an investor has to make a decision not only on what stock they want to buy, but when they want to buy it. What price they want to pay to own the shares.
So whatever rational you use to decide when to purchase a stock, technical analysis, fundamental analysis, dividend plays…the price you pay to buy the stock goes a long way in maximizing profits when you’re right and minimizing losses when wrong.
What if whatever price you placed your order to buy the shares, you could get paid to buy the shares at that price? You could literally get paid a premium to buy the shares you’ve already decided to buy, at the price you want to buy them at?
While most people think of put options as bearish plays, because when you buy a put option, they allow you to sell shares of a stock at a set price, no matter how low the stock drops from that price. However, when you sell put options, you’re not buying the right to sell a stock, you’re selling an obligation. You’re taking on an obligation to buy shares of a stock at that strike price…in exchange for collecting a premium.
For example, if a stock is trading at $98 a share, and you decide you want to buy the shares at a support, or a demand level, (or any other reason), of $95 a share. If you sell a put option at the $95 strike price, and collect a premium of say $2.25, what did you just do? You just collected $2.25 a share, to buy shares of stock at $95 a share, which you wanted to buy anyway at the price you wanted to pay.
If the stock is at or below $95 at the options expiration date, you will be assigned, meaning you will have to buy the shares at $95 share. However, if you were paid $2.25 a share to buy those shares at $95, didn’t you in effect buy the shares for $92.75? Isn’t that awesome?
That’s not only at your desired purchase price, but at a discount of 2.3%. Now selling puts to buy shares you want to own doesn’t mean the trade can’t go against you, it doesn’t mean the stock can’t go further down. However, if it does tank, you actually paid less to buy the shares (compared to the $98 price), so you’ll lose less if the trade goes against you.
Oh, and one other benefit, if the stock doesn’t get to $95, you never have to fulfill your obligation to buy the shares. And you get to keep the $2.25! You keep the premium without having to buy the shares. So you’ll either buy the shares you wanted to buy, at a discount, or keep the premium and not have to buy the shares! Sounds like a win/win?
There is a lot more to learn about Options and numerous Strategies used to trade Options successfully. We encourage you to register for a Free Trading Workshop to learn a lot more. Click here to register now.
Please note, trading Options carries significant risk and must be done only with proper education, practice, and expertise.