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How to Generate Income without Owning a Single Share

Do you realize that you can actually be paid to buy stocks at the price of your choosing?

Yes, that’s correct. Someone will pay you cash today for your promise to buy any stocks you want at a cheaper price than where it is currently trading.

It’s simple. It’s real. And it’s totally legitimate. And for serious investors . . . it’s a necessity.

For some reason, however, the old regime of the financial industry would have you think otherwise.

But do we really care what they think? They have led us astray for years, so why should we continue to listen to their archaic ideas?

The only requirements for this strategy is that you find a stock or ETF that you want to own, come up with a price that you’re willing to pay, place the trade and collect your income.

Yes, it is that simple.

As a professional options trader for roughly 15 years, I have discovered that most options strategies are best within certain types of market environments. However, this strategy – known as a favorite among options professionals – works well in any market environment – bullish, bearish or neutral. So what is the strategy to generate income without owning shares? Selling puts, or put option selling. The semantics don’t really matter.

Selling puts is the best way to obtain the stock or ETF you have been eyeing for a much lower price than where it’s currently trading.

When a stock or ETF’s price is inflated, most investors enter a limit-buy order for the underlying at a lower price. Yes, they sit and wait and wait . . .  and wait some more. In most cases this goes on for months with nothing happening other than lost opportunity costs. In fact, it’s been shown that more than 99% of all investors do it this way.

But by selling puts on a stock that you wish to hold in your portfolio you could be collecting income, thereby lowering the cost basis of the stock even further.

We’ve been doing just that in our High Yield Trader portfolio for big gains. I’ll get to that in a sec.

How to Generate Income by Selling Puts

Selling a put option means that you are obligated to buy the 100 shares at the strike price if the buyer so chooses prior to the expiration date. This, of course, won’t happen until the stock price drops below the strike price.

This is where you — the put option seller — come in. Since you want to own the shares (albeit at a lower price), you sell a put option and just wait until options expiration.

If the underlying issue closes above your chosen price (the strike price), the put expires worthless and you get to keep the entire premium collected at the outset.

If the underlying issue closes below the strike price, you will be put (assigned) the stock or ETF that you wanted. In other words, you will be obligated to buy the shares at the strike price. You now own the stock you wanted … at the lower price you were willing to pay.

Just think how much you could reduce your cost basis if you did this for months.

Everyone knows you’re supposed to buy low and sell high. This advice is so common and so basic.

And yet, almost no one talks about how to buy low – let alone how to sell high.

Here’s how selling puts works – and we’ve used this strategy to collect 23.3% in income on an ETF that has fallen 13.3%.

Back in April we were eyeing Market Vectors Gold Miners ETF (NYSE: GDX), but at more than $28, the ETF was outside of what we wanted to pay. Our price was $20. We wanted to own 100 shares of the ETF at $20 for a total cost of $2,000.

Under normal circumstances, while we waited to hopefully get in at $20, our capital would sit idly on the sidelines making next to nothing. But if we sold puts at the strike price ($20 in this case) of our  choosing – we get paid while we wait.

So we did just that. We sold a put option with a strike price of $20 that expired in one month for $0.33, or $33 per contract (one option contract = 100 shares), or a 6.04% return for 30 days. We’ve done a similar transaction four additional times over the past six months for a total return of 23.6%.

And you can do this into perpetuity, assuming that the stock price remains above your strike price. Of course, if you end up buying the shares at the strike price, you own the ETF, which is what you wanted in the first place.

This is why professionals prefer to sell puts. They know if done correctly, the strategy has the potential to own a stock for next to nothing.

Please, if you have any questions on how to generate income by selling puts do not hesitate to email me. Once you learn how simple and powerful the strategy is you will never bother buying a stock or ETF in the traditional manner again.

 

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