I can almost guarantee that what I’m about to say is something you’ve NEVER heard before. The idea might be so foreign and strange, that you’ll be tempted to dismiss my comments entirely.
But I feel like most investors fall prey to a common and often repeated investing myth.
It’s the idea that selling puts is the single most dangerous financial transaction in the investment world.
It’s not true.
In fact, selling puts is exactly as safe as selling covered calls – something that most investors believe is extremely safe.
It’s true; selling puts is safe. You might think I’m crazy or simply wrong…
But in the options world, these two types of investments are known as “synthetics.” Meaning that they’re identical in terms of risk, upside, downside – everything. They’re the same as far as the actual math is concerned.
The difference is purely psychological. It’s a fiction created by the mind.
Okay – let me back up. I should clarify one thing.
Here’s the “catch.”
Selling puts and selling covered calls is EXACTLY the same in every regard except for one.
Selling puts is better!
That’s because of a bias in the options market that allows put sellers to go further out of the money for the same amount of income. That creates a bigger margin for safety.
Let’s back up again – why is selling a covered call EXACTLY the same as selling a put?
That’s because in both cases, you have a set amount of cash at risk. With a covered call, it’s the price of the shares you own that you may have to sell. With a put, it’s the price of the shares you have to buy.
In both cases, the amount of capital at risk is the same – and the premiums are about the same too.
So if the risk is the same, and the payout is the same… why do people believe put selling is risky, but covered call selling isn’t risky?
The reason people believe puts are risky is that they frequently sell puts on stocks they don’t want to own and/or they sell too many contracts. Remember, one options contract controls 100 shares. For a stock that sells for $25 that comes to $2,500 of stock you control for each contract you sell.
Just like with a covered call, you should never sell puts against shares you don’t own or don’t want to own.
This strategy works perfectly with stocks you want to own.
You simply sell a put against shares of a company you want to own at the price you wish to pay. If you get “put” to the shares – great. If you don’t, then you can sell the put again and again until you do get put.
So why aren’t more investors selling puts?
Well, probably for the same reason that you feel uncomfortable about the thought of selling puts right now.
But I know that if you just try it once, you’ll never buy stocks the same way again.
Once you learn how to use this strategy, you’ll begin to see the world of finance differently. Instead of “paying” people to invest your money, you get paid to invest.
If you’re looking for a little more information, I just published my latest issue this morning at the market’s open. In it, I talk about the specifics of selling puts on two stocks that I know people are interested in owning for the long term.
The one real caveat is that the information in this issue is not evergreen: the prices I list will be out of date in a matter of days if not hours, depending on how the stocks move.
So if you’re interested, I urge you to click here to sign up for a risk free trial to High Yield Trader – my service dedicated to creating safe income by selling puts and calls.
As always, if you have any questions or concerns, please drop me an email at [email protected].