Buying Stocks at a Discount by Selling Put Options
Do you like to shop for stuff on sale? Then you may be surprised to know that you can buy your favorite stock for a discount. In fact, this strategy is one that has helped Warren Buffett get his favorite stocks at a lower price. It is known as put selling. Here, we will take a look at what put selling is and how it can lower your cost of buying a stock.
What is Put Selling?
Put selling is the strategy of selling a put contract for one of two purposes. The first reason why you can sell a put option is to generate an income. The second reason to sell a put is to own a stock at a desired price.
So what is a put? A put is an option contract where you have the opportunity to sell 100 shares of a stock - at a certain price - by a certain date. While some people buy put options so they can sell their stock at a certain price, you can sell a put option to have 100 shares “put” to you at a certain price. In a sense, you agree to purchase 100 shares of a stock when you sell a put option.
Example of Put Selling
Let’s say that you like to buy shares of Ford (F). However, the stock has moved up dramatically over the last three months and it sits at $30 a share. Instead of chasing the stock, you sell five put contracts of Ford at $27 a share with an expiration 45 days away. You sell each contract for $1.50 and you receive $450. In return, you put up as collateral the cash equivalent of 300 shares of Ford at $27 or $8,100. That $8,100 is held in your brokerage until one of three things happen:
1). The contracts expire worthless
2). You buy back the contract
3). The contract is put to you and you buy 300 shares of F at $27
Benefits of Put Selling
There are a number of reasons why you will want to sell puts. Here’s a look at the three top benefits.
1). Generate an Income
Some people will sell puts to generate an income. This is a great strategy in a bullish market since you have a great chance to make money each month.
2). Own a Stock at a Discount
The most common reason to sell puts is to buy a stock that you like at a lower price. This is the strategy used by Warren Buffett.
3). Manage Risk
You can also sell puts as a way to manage risk. That’s because the most money you can lose is the collateral you put up to sell the puts.
Put Selling Strategies
The best way to get started selling puts is to make a list of stocks that you like. Then take a look at those stocks and decide which price you’d like to own the stock. Try to sell a put that is closest to 45 days to its expiration date to take advantage of theta decay or the rate at which the put contract loses value.
Getting Started with Put Selling
If you love a bargain, then put selling is a smart way to get a stock you like at a price that you will love. Be sure to make a list of stocks that you won’t mind owning and get started today. You may find the next great stock deal sooner than you think.
REFERENCE:
https://www.thebalance.com/what-is-a-put-option-long-short-buy-sell-example-3305880
https://wealthfit.com/articles/selling-options-for-income/
https://www.investopedia.com/terms/t/timedecay.asp
