Put-Option Selling
As Easy as 1-2-3
As you may know, an options contract is an investment just like anything else. You can either buy or sell options just like you can with stocks.
The Instant Money Trader uses a little known technique called “put-option selling” that focuses on giving you an opportunity to acquire some of the best-known companies traded on the major stock exchanges… at prices you never imagined possible, while getting “paid” instant cash upfront just for your “troubles.”
Here are the basics…
Before I get into the nitty gritty of selling put options, let’s talk about where our instant cash payouts are coming from – the BUYERS of put options.
An investor who buys a put option on a stock is basically taking a bet that the stock is about to take a nosedive.
They’re so certain in fact, they’re willing to PAY money upfront. (This is where you can get “paid”).
Here’s an example…
So let’s say Company X was trading for $122. But a trader, we’ll call him Bob, thinks the stock is about to take a plunge this year. He can BUY the March 2011 $80 put options trading for $3.50 each. (Please note: These prices are hypothetical).
In doing so, this contract gives him the right to sell that stock at $80 (the strike price) up until March 2011 (the expiration).
And since each contract is based on 100 shares, Bob would pay $350 up front for one put option contract. (The instant cash payout).
So if Company X dropped to $78, Bob could sell the 100 shares of Company X for $8,000 (based on the $80 strike price)… then buy the shares back for $7,800. Sure, he would have made $200 on the trade, but since he paid $350 upfront, he really incurred a loss of $150 plus commissions. Ouch.
Even worse… If Company X doesn’t fall below $80 per share, the put option will expire worthless, and Bob loses his full $350.
Plus, with these types of option contracts (known as out-of-the-money or OTM options), that’s exactly what happens up to 90% of the time. I don’t know about you, but I don’t like those odds.
That’s why we’re on the other side…
Why We’re Recommending Selling the Puts – Not Buying Them
Instead of buying put options and praying stock prices drop drastically in the near future, we recommend getting paid just to sit around.
Here’s how it works with the Company X example.
You’d receive the $350 upfront for selling the put option contract to Bob, which you can spend as you please. Pay some bills, go to a football game, buy that new blu-ray player you’ve had your eye on, anything!
What’s the catch? (Well, I don’t know if I’d call it a “catch” really)…
By selling the put contract, you now have an obligation to buy the 100 shares of Company X at $80 per share… But ONLY if it drops down to $80 at expiration.
In that case, you could put that $350 you received upfront toward your initial cost-basis, and you’d end up paying $7,650 for the 100 shares. But again, I don’t think of this as a “catch” at all.
Indeed, who wouldn’t want to buy Company X at $80 per share when just a short while ago it was at $122? Not a bad trade if you ask me. You get a quality stock at a ridiculous bargain, and someone gave you $350 for your effort.
And get this: If the stock stays above $80 at the expiration date, you can still keep the cash you made on the initial transaction.
It’s what can make The Instant Money Trader a win-win, no matter what the market throws our way…
Two important items to know before you start trading put options…
First, if you are not currently set up to trade options and you decide to follow the recommendations, then you need to have a broker get you started.
And if you’re new to the options world – one of the fastest growing areas of the market – you’ll need approval from your broker before you can start trading them.
But this just involves filling out a simple form and then you’re good to go. Most brokers today understand the risk/rewards of put selling so they should be accommodating without too much hassle.
Secondly, when selling put options, you will be required to have a margin account that keeps cash on hold while you have a put-sell position active. If you are ever assigned on the options and are required to buy the shares at that time, you need to have money in your account to cover the cost of those shares.
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