Forget everything you think you know about buying stocks.
If you’re like most investors, you probably research a stock then go to your brokerage account and buy it.
That’s fine… but there’s a better way. In fact, this method will give you cash to buy whatever stock you want at the price you choose – and at a hefty discount to its current price.
Yes, you read that right. The market will give you cash to buy stocks.
How to Make Money the Second You Buy a Stock
You use a strategy known as put-selling – selling put options against stocks you want to buy.
And in doing so, you pocket cash in your trading account – immediately – without even having to own the underlying stock.
When you execute this strategy, you’re obligating yourself to buy the stock you select for the “strike price” you’ve chosen at a specific point in the future.
For that obligation, option buyers will give you cash while you wait. So you’ll either make money, or own great stocks at bargain-basement prices.
And given that most option buyers lose on their trades while sellers make money, it’s a compelling reason to sell puts.
You just need to find a stock that boasts the following characteristics:
- It’s a solid, blue-chip stock.
- It’s a stock that you’d be comfortable owning at the price you select.
So let’s take tobacco firm Philip Morris International Inc. (PM) as an example – which certainly fits the bill as a well-established, blue-chip company.
Grab $425 Just for Making a Trade
With Philip Morris currently trading at about $90 per share, the first job is to decide on a price and time frame for the puts you’re going to sell.
This is precisely why you should always pick a stock that you’d be comfortable owning in case you’re obligated to buy the shares at options expiration.
With Philip Morris, you know you’d be buying a stable company that also has the bonus of paying a dividend ($4.08 per share annually).
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In this example, we’ll select the January 2016 $82.50 put options. From a technical standpoint, there’s some support here if the price drops from current levels. And January expiration gives sufficient time to make the sale worthwhile.
With one options contract equivalent to 100 shares and the $82.50 puts currently trading for around $0.85 per contract, let’s say we sell five contracts worth 500 shares. That would instantly put $425 in your account ($0.85 x 100 x 5 = $425).
With the $425 pocketed, you just let the position play out to options expiration.
Your Need-to-Know Scenarios
If Philip Morris remains above the $82.50 strike price at that point, the options will simply expire.
You’d keep the $425, you won’t be obligated to buy Philip Morris, and the trade is closed. But you can repeat the process with a different strike price or expiration date.
If Philip Morris is trading below the $82.50 strike price by expiration, the scenario is different. You’ll then be obligated to buy those 500 PM shares at the predetermined price of $82.50 per share.
You’ll then simply own Philip Morris as if you’d bought it directly. And you keep the $425.
Do you see now why it’s important to select a stock that you’d be comfortable owning at a lower price that you pre-selected in advance?
Don’t simply sell puts on random stocks in order to pocket cash. Make sure they’re quality companies that you like.
It’s also critical that you don’t sell more options contracts than you can afford. (Remember, one contract is worth 100 shares.)
Also, keep in mind that your broker will need you to set aside a portion of the total share cost – a “margin requirement” – while the trade is active in case the stock is assigned to you. The amount varies from broker to broker.
However, if you change your mind or don’t want to be locked into owning the stock, you can buy back the put options at any point before expiration.
You’d also do this if the options are trading below the price you sold them for – thus grabbing a profit.
Ultimately, put-selling is a terrific way to buy stocks for less than their current prices, while earning money from the trades at the same time.