|Editor’s Note: We originally published this article back in January. But Lee just informed us that the current market environment is perfectly suited for using this strategy.|
Thousands of investors trade shares in the market every day. But they’re making a very costly mistake.
That is, they’re choosing to purchase shares at current market prices.
Simply put, if you’re buying at today’s prices, you’re not getting a good deal.
Even if you think a stock is trading at a cheap valuation, you’re still paying more than you should.
That’s because there’s an ingenious way for you to scoop up your favorite stocks at much lower prices than you’re seeing today. (Hint: I’m not talking about using limit orders.)
Reinventing the Limit Order
A limit order allows you to buy a stock when (and if) it falls to a pre-determined price.
And it’s a solid way to ensure that you’re getting a better bargain. There’s just no guarantee that the stock will fall to the limit price.
So you could be waiting around indefinitely for the stock to move in the direction you want.
Now, one strategy I like to use not only allows you to set the price you’re willing to pay for the stock, but also pays you cash while you wait for the stock to dip.
In other words, it’s like getting paid to set a limit order!
That way, even if the stock never falls, you at least received some cold, hard cash for the time you wait.
I’ve been using this strategy for the better part of 24 years now, and it hasn’t let me down yet. It’s called put-selling, and it’s one of the best-kept secrets in the investing world.
The Best No-Brainer Strategy Around
Put-selling is an option trading technique. That alone tends to scare people off. But rest assured, it’s a very safe and conservative trading method.
In a nutshell, when you sell a put option contract to someone, you’re obligating yourself to buy a particular stock… at a particular price… within a certain time frame. And in exchange for your obligation, you will get paid upfront cash from the put option buyer.
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The best thing about this strategy (apart from getting paid money up front) is that you get to choose the stock and the price you’re willing to buy it at. And you get to choose the time frame, as well.
Sounds like a no-brainer, right? That’s because it totally is!
Here’s the very basic rundown of how selling a put would work…
First, you’d pick a stock you like – making sure it’s one that you have a true interest in buying. Then, instead of buying at today’s prices, pick a level that you’d be much happier buying it for (that would be your strike price).
At that point, you’d sell the associating put option to the buyer (i.e., someone who’s taking a guess that the stock is going to fall, and is willing to pay a going price for that put option).
So what’s the catch?
Well, if the stock falls to that level within the time frame, the put option seller has to fulfill his or her obligation and purchase the shares. Of course, since you were planning to purchase shares anyway, that’s not really a bad thing. It’s what would happen if you placed a limit order in the first place!
But that brings me to another bonus of using this technique…
How the Cash Really Piles Up
Over 90% of the put option contracts that are bought will never reach the intended target.
Put another way, more than nine out of 10 times, the underlying stock fails to reach the desired level. At that point, the contract just expires worthless. But the seller still gets to keep the cash that was paid up front.
Granted, the put option seller doesn’t get to buy the shares of stock. But he can just do the trade all over again and collect even more cash – hoping that the stock will fall to the intended target this time.
And before the seller knows it, he’s accumulated a boatload of cash.
It’s easy to see how selling put options can constantly fill your account with hundreds, thousands, or even tens of thousands of dollars throughout the year.
Chief Options Analyst, Wall Street Daily