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Pocket $850 in Just 10 Months’ Time

Do you like cash payouts?

How about a steady stream of income that beats the pants off dividend-paying stocks or even MLPs?

Would you like the opportunity to buy the stocks you want at a discount?

I hope you’re answering “yes,” because that’s what I’m offering you today: a strategy that lets you bank cash and save money on the stocks you want to own.

It’s called “put-selling” or even “naked put-selling.” And it’s one of the most effective strategies you can use to make money in the energy sector.

Furthermore, despite what you may have heard, the risks of put-selling are minimal – so long as you do it properly.

It sounds too good to be true, I know. But let’s delve a little deeper – using one of our favorite energy stocks, Chesapeake Energy (CHK), as an example – and I’ll show you how it works.

We’ve talked a lot about Chesapeake in the past. And for good reason: It’s a company worth owning.

You see, Chesapeake has been shedding non-core assets, restructuring management and efficiently switching production from gas to oil to take advantage of market prices. It’s also using hedging techniques to smooth out its income stream.

Chesapeake’s strength was illustrated by a stronger-than-expected fourth-quarter earnings report. And with huge reserves and very good leverage to natural gas prices, Chesapeake will continue to be the best long-term play in the natural gas sector.

The problem is, CHK doesn’t pay much in the way of dividends – about 1.7% based on current prices. It’s also exceedingly volatile. However, as I’ve mentioned, that volatility makes it ideal for options trading.

For upside moves, the LEAPS strategy I showed you last week is the perfect way to play Chesapeake. But if you’re looking to establish a long-term position in CHK, or score some extra cash, there’s another method that you should consider.

Using this method, you can either own shares for much less than market price, or get paid a triple-digit “dividend” for your efforts. It’s an either/or proposition.

Here’s how it works…

A Win-Win Proposition

Chesapeake shares are currently trading around $20.50.

However, Chesapeake January 2014 $15 put options are trading around $0.85 per contract (each contract represents 100 shares, so the actual premium is $85 per contract). So if you’re interested in owning CHK at $15 or lower, you can SELL these put options and rake in cash instantly.

That’s right – instant cash. For example, if you sell 10 contracts (1,000 shares) at $0.85 per contract, you take in $850 immediately.

All you need to execute this trade is about $3,000 in margin equity (20% times the strike price of $15 x 10 contracts or 1,000 shares). That means your return on margin is 28% ($850 divided by $3,000).

Then you play the waiting game. And if the shares are still trading above $15 when your options expire in January 2014, you do nothing and still pocket the money you received upfront.

What happens if CHK is trading at $15 or less by that time? You simply take delivery of the shares at $15, minus the $0.85 you already paid, for a net cost of $14.15. That’s a whopping 30% below the current trading price.

See, it’s really quite simple. You just have to keep the following three things in mind:

  1. Establish a margin/options account so you can execute put-sells.
  2. Use strike prices below the current share price to give you added protection.
  3. And only sell puts on companies that you want to own.

If you can do those three things, then you’ll get a steady stream of income, the chance to buy stocks at a discount and a serious shot at outsized returns.

And “the chase” continues,

Karim Rahemtulla