Investing In Options: Buy High Quality Stocks At A Discount

| July 16, 2012 | 0 Comments

Let me ask you a question…

How do you buy high quality stocks at a discount?

Most investors simply wait for the stock to fall to the price they want to buy it.  Some investors will enter a buy limit order with their broker to purchase a stock when it falls to the price they want to pay. 

And that’s fine. But there’s a better way to buy stocks at a discount. 

You see, if you set a buy limit order, your broker sets aside money in your account to purchase the stock just in case it falls to the price you said you want to buy it. 

Here’s the problem…

The stock may never fall to the price you want to buy it. You could easily tie up a large chunk of your trading capital sitting on the sidelines. 

To make matters worse, you’re not earning anything on the money you’ve set aside.  And you’re also missing out on the profits you could be making if you had the money invested in another investment.

Selling put options gives you a way to pin-point the price you want to buy a stock and pay you to wait for the stock to fall to that price.  That’s a win-win scenario!

Here’s how it works…

Selling a put option obligates you to buy the stock at the strike price of the put option.  And as the seller of the option, you immediately collect the option premium.

Let’s say you want to buy 100 shares of IBM (IBM).  Today IBM is trading for around $185 per share, so it will cost you about $18,500.  But you’d like to pay closer to $170 per share.

By selling the IBM $175 October 2012 put for $5, you will immediately collect $500 in option premium. 

If IBM falls below $175 before the option expires in October, you’ll be assigned 100 shares of IBM at a cost of $17,500.  But don’t forget, you already collected $500 in option premium when you sold the options.  So your total cost to buy 100 shares of IBM is only $17,000 or $170 per share.

However, if IBM doesn’t fall below $175, you won’t get the shares.  But you’ll still get to keep the $500 in option premium you collected when you sold the option.  So at least you’re getting paid to wait for the stock to fall to the price you want to pay.

As you can see, selling out-of-the-money put options on stocks you want to own is a win-win.  Either you get to buy the stock at a big discount or you get paid to wait.

Good Investing,

Corey Williams

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Category: Investing In Options

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.