Editor’s note: This is the second-to-last issue of the special series I’ve been writing about what I consider to be the best income strategy in existence: put-selling. If you’re interested in learning more about how this strategy works, I recommend watching my webinar replay by clicking here.
Last week, I wrote about how selling puts on gold stocks during the last three years returned 33%, while simply owning gold stocks would have returned 0%. You can re-read that piece here.
Today I wanted to discuss what you might expect by selling puts on an investment that you think might rise. After all, the big fear or perceived risk in selling puts is that yes, you get to collect up front income, but you also can miss out on big gains if you don’t end up owning the stock.
As you may recall, selling a put obligates you to buy shares of a stock or ETF at your chosen short strike if the put option is assigned.
If the stock or ETF never hits that strike price, you won’t ever own it – and you’ll have missed out on big gains…
For example, do you want to buy Twitter (NYSE: TWTR) after its recent earnings woes, but not at the current price of $15.77? You prefer to pay 10% less. Just remember, it’s imperative that you want to own Twitter stock and its incredibly large 313 million active users in your portfolio. If not, save yourself some time and wait for tomorrow’s article. But, if you are interested in owning Twitter stock, here is my preferred method for buying the stock at a 10.4% discount.
As seen in the options chain below, by selling the September 15 puts you can bring in approximately $0.36 or $36 per contract. In this instance, you are selling the put with the intent of buying the stock for $15 if, at expiration in roughly 35 days, the stock is trading at or below $15.
Selling the 15 put requires you to have $1,500 of cash in your trading account.
Typically, selling puts only require 20% of the $1,500, or $300, but retirement accounts and certain brokers require the puts to be cash-secured. And in this case, that would be the $1,500. As a way to remain conservative, I often prefer to use the cash-secured approach. The return on a cash-secured trade is 2.3% over 35 days . . . over 23% annually. And if the puts were not cash-secured, the return on capital would be significantly higher.
Referencing the same options chain, you can see below that you have other levels or strike prices where you can sell puts. If you choose to sell a strike closer to the current price of the stock, say $15.5, you could bring in even more premium, but the probability of success goes from 70.66% for the 15 puts to 62.18% for the $15.5 puts. So, you do have to make a few decisions as to how much risk you are willing to take based on the strike you choose.
Back to our example, we decided to sell the September 15 puts for $0.35. The $35 is ours to keep regardless of what occurs with TWTR.
If the stock closes at September expiration above $15, we keep the $35 and oftentimes repeat the process by selling more puts, maybe at the 15 strike or possibly at a different strike price. It truly depends on where the stock is trading at the time we sell the puts and how much premium we wish to bring in.
If the stock trades for less than $15 at September expiration we are assigned the stock for $1,500, 100 shares per put contract sold.
It’s likely that Twitter stock could rise far above our strike price. That’s not necessarily bad news – we still would have collected 2.3% in income in about a month. I think it’s better to get paid to wait for the right price, than to buy a stock and risk having it fall.
You’ll notice in the first case, we’re getting paid to accept the risk of missing out on gains. In the second case, we’re not getting paid, and we’re assuming the risk of the entire value of owning shares.
I like that risk-reward profile. And if you do too, I recommend taking a look at a current offer I’m running on my put-selling research service, High Yield Trader.
I’ve put together a package of four detailed research reports and over 10 hours of training to give you a huge running start to learning how to profitably sell puts.
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