We did this by implementing a put-option selling technique in which we got paid instant cash up front for our obligation to buy Apple for $350 per share.
We were paid $101 for each put-option contract sold. Those who sold 10 put-option contracts received a fat payment of $1,010 into their trading accounts.
Since then, Apple has rallied almost $100 per share higher to $674 per share. And although we haven’t had the opportunity to buy shares at $350 yet, at least we’ve been able to keep our upfront cash payments.
That’s how put-option selling works: You either get to buy the shares at your desired price, or you get to keep the money you received initially.
While the Apple trade has a few more months before its expiration date in November 2012, we thought we’d offer up another put-sell opportunity in a different powerhouse stock: Google (Nasdaq: GOOG).
My colleague, Karim Rahemtulla, discussed the beauty of Google’s business model on Monday. But with the company currently trading around $679, I’d imagine some investors would like to hold off until shares drop a bit.
How’s $400 sound?
Buy Google At An Insane Discount… and Get Paid for Trying
As with our Apple trade, selling puts starts with checking out the company’s options chain. The chart to the right shows what Google’s put options looked like when it was recently trading for $673.
Scan down the “strike” column and you’ll see price levels in which you could potentially buy Google stock.
The $400 options have a bid price of $1.10. Meaning for every one put-option contract you sell, someone will place $110 in your account for you to keep. Ten contracts would give you $1,100… and so on.
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These contracts expire in January 2013. So in return for that money, you’re obligated to buy shares of Google (100 shares for each contract sold) for $400 per share – but only if the stock falls below that level by then. That’s a full $273 per share lower than where it currently trades. Not a bad bargain, for sure.
Of course, with the way Google’s been trading lately – tacking on about $115 per share in the last two months – it doesn’t seem likely that the stock will hit $400 any time soon.
However, even if it doesn’t fall to $400 by January 2013 you just walk away with the money you pocketed initially. Then you can repeat the process if you want.
Of course, if the $400 strike isn’t to your liking, then you can pick another option. The higher the strike, the more money you’ll get at first. But choosing a bigger strike price will obligate you to potentially buy the stock at higher prices.
If you’re interesting in put-selling, here are a few things you need to keep in mind…
- In order to do these trades, you must have an approved option-selling margin account with your broker.
- Only do these kinds of trades on stocks you’re actually willing to buy and hold.
- Remember, each option contract represents 100 shares of stock. Selling five put-option contracts obligates you to buy 500 shares. Only sell the number of put-option contracts that correspond to your risk tolerance.
- You can get out of the trade anytime you wish. You don’t need to wait until the option expiration date.
Once you understand all that, it’s all about picking the perfect time to get in. If you’re looking to make a bit more cash on the initial put-sell, you can wait for a pullback. As share prices drop, put-option prices increase. So you pocket more money up front.
Talk with your broker or financial consultant if you think these types of trades could be right for you.
Ahead of the tape,