The Only Way I’ll Ever Buy Stocks

Selling a put obligates you to buy shares of a stock or ETF at your chosen short strike price if the underlying asset closes below that strike price at options expiration.
For example, let’s say you wanted to buy the United States Oil Fund (NYSEArca: USO), but not at the current price of $9.80. You prefer to pay $9, an 8.9% discount to the current price of the oil ETF.

By selling the May 9 puts you can bring in approximately $0.32, or $32 per contract. In this instance, you are selling the put with the intent of buying the stock (100 shares per options contract sold) for $9 if, at expiration in roughly 52 days, the stock is trading at or below $9.

Selling the 9 put requires you to have $180 of cash in your trading account.
Typically, selling puts only requires 20% of the $900, or $180, of the cash needed to purchase 100 shares of USO at $9. But retirement accounts and certain brokers require the puts to be cash-secured. And in this case, that would be the $900.
The return on the trade is 3.6% over roughly 52 days, or 25.2% annually. And if the puts were not cash-secured, the return would be significantly higher.
As you can see from the options chain above, you have other levels where you can sell puts. If you choose to sell a strike closer to the current price of the stock – say, $9.50 – you could bring in even more premium, but the probability of success goes from 65.81% for the 9 puts to 54.26% for the $9.50 puts. So, you do have to make a few decisions as to how much risk you are willing to take based on the strike you choose.
Back to our example, we decided to sell the May 9 puts for $0.32. The $32 is ours to keep regardless of what occurs with USO.
If the stock closes at May expiration above $9, we keep the $32 of premium and oftentimes repeat the process by selling more puts, maybe at the 9 strike or possibly at a different strike price. It truly depends on where the stock is trading at the time we sell the puts and how much premium we wish to bring in.
If the stock trades for less than $9 at May expiration we are assigned the stock for a cost of $900, 100 shares per put contract sold.
To learn more about how I buy stocks for lower prices and generate a steady, conservative income stream by selling puts, I invite you to check out my upcoming webinar for my Options Advantage service. Just click here for more details and to get registered for the event.