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There’s a huge and thriving market for options traders who want constant trade ideas. They want three to five risky trades each day! It’s essentially the same type of person who buys lottery tickets every day. They get some kind of thrill over the idea of “hitting it big.”
But I’m not running an “options trading service” that swings for the fences. And I’m certainly not claiming that you’ll get rich off any single trade idea I publish.
I provide very straightforward, realistic ways to receive more income from the market’s safest stocks.
So if you have those same expectations of constant “trading” ideas and dozens of “big winner” trades every week, this service isn’t for you.
But if you believe that the most realistic way to investing success is to wait patiently for what Warren Buffett calls the “fat pitch,” then High Yield Trader is THE service for you.
While we expect to present five to 10 opportunities each month, the trades will not be fixed to some sort of arbitrary investment schedule. The market will present us with the best opportunities to collect income from the safe stocks we own – not the other way around.
Investment success comes from process. Period.
If you would like to learn more about how we use options for income, please do not miss our event this upcoming Wednesday, Sept. 23 at 12 p.m. EDT. We cover the primary strategies used in High Yield Trader, plus several real-time trades. Click here to register for the event.
Selling Puts
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.
Selling puts, in my opinion, is by far the best way to obtain the stock or exchange-traded fund you have been eyeing for a much lower price than where it’s currently trading.
When a stock or ETF’s price is inflated, most investors enter a buy limit order for the security at a lower price. Yes, they sit and wait and wait … and wait some more. In most cases this goes on for months with nothing happening other than lost opportunity costs. In fact, it’s been shown that more than 99% of all investors do it this way.
But by selling puts on a stock that you wish to hold in your portfolio you could be collecting income, thereby lowering the cost basis of the stock even further.
How to Generate Income by Selling Puts
Selling a put option means that you are obligated to buy 100 shares of the underlying security at the strike price if the buyer so chooses prior to the expiration date. This, of course, won’t happen until the stock price drops below the strike price.
This is where you – the put options seller – comes in. Since you want to own the shares (albeit at a lower price), you sell a put option and just wait until options expiration. Or maybe, you just wish to use a stock you like to bring in steady, reliable income without taking on the capital associated with owning the stock.
Either way, if the underlying issue closes above your chosen price (the strike price), the put expires worthless and you get to keep the entire premium collected at the outset.
If the underlying issue closes below the strike price, you will be put (assigned) the stock or ETF that you wanted. In other words, you will be obligated to buy the shares at the strike price. You now own the stock you wanted – at the lower price you were willing to pay.
Just think how much you could reduce your cost basis if you did this for months.
Everyone knows you’re supposed to buy low and sell high. This advice is so common and so basic. And yet, almost no one talks about how to buy low – let alone how to sell high.
Here’s how selling puts works (in very basic terms).
Back in late November we were eyeing Pfizer (NYSE: PFE), but at roughly $31, the blue chip stock was outside of what we wanted to pay. At the time, our desired price was $29. We wanted to own 100 shares of the stock at $29 for a total cost of $2,900.
Under normal circumstances, while we waited to hopefully get in at $29, our capital would sit idly on the sidelines making next to nothing. But if we sold puts at the strike price of our choosing ($29 in this case), we get paid while we wait.
So we did just that. We sold a put option with a strike price of $29 that expired in two months for $0.42, or $42 per contract (one option contract equals 100 shares), for a 7.2% return in roughly 60 days.
We’ve done a similar transaction five additional times over the past 10 months for a total return of 39.2%. And we plan on doing this same transaction into perpetuity, assuming that the stock price remains above our strike price.
Of course, if we end up buying the shares at the strike price, we own the stock at the strike price minus the total premium we have managed to sell over the past 10 months.
This is why professional options traders prefer to sell puts. They know if done correctly, the strategy lowers your cost basis and provides the potential to own a stock for significantly less than its current price.
Again, if you would like to learn in far greater detail about how we sell puts and covered calls in the High Yield Trader service, please make sure you register for our upcoming teleconference on Wednesday. In addition to discussing the strategies, we will also be giving away four free trades. Click here to register.