Why Are You Not Using This Income Strategy?

Today, I’d like to discuss one simple way to guarantee that you buy at exactly the low price of your own choosing – and, even better, how you can get paid to do so.
I’m not going to discuss which stock to invest in, but rather, how to invest in the stock of your choosing in the best possible way.
What is this income strategy?
Selling put options.
Here’s how selling puts actually works – and how using this strategy can actually boost your income while you wait for the price you want to pay for a given stock.
For instance, say you are a contrarian and highly interested in diving into the beaten-down energy sector, more specifically the explorers. You aren’t sure about which company to choose so you’ve decided to buy the SPDR S&P Oil and Gas Exploration and Production ETF (NYSEArca: XOP).
The energy ETF is currently trading for roughly $39, but you feel the price could push lower. Rather than set a limit price of $36, you could sell puts at your “limit price” and boost your income while you wait for the ETF to hit your price of $36.
If you would like to own for $36, you could sell front-month (December) options premium for at least $1.21, but realistically you could sell it in between the bid-ask spread for roughly $1.25, or $125 per contract.

(As a quick aside, typically when you have a wider bid-ask spread you want to sell your option of choice halfway between the bid-ask spread. This alone will increase your return significantly over the long term.)
Say you wanted to purchase the 100 shares of the ETF at $36 for a total capital outlay of $3,600.
But if you sell puts at the strike price of your own choosing you get paid, which lowers your cost basis. And if your price isn’t hit at expiration, you simply sell more puts, thereby lowering your basis even further.
I am always befuddled by the fact that retail investors choose not to sell puts, particularly in this situation.
In this case, you would sell one put at the December 36 strike because you are willing to own 100 shares of the stock at $36. Remember, one options contract equals 100 shares of stock.
Again, we could sell one XOP December 36 put for roughly $1.25, or $125 per contact, over the next 39 days. If XOP falls below your strike of $36 at expiration you would be assigned the stock at $36 share – 7.7% lower than the ETF’s current price of $39.
Additionally, you can subtract your collected premium of $125 to decrease your cost basis even further. So in reality you’re actually own the ETF for $34.75 ($36 – $1.25). That’s a savings of 10.9% off the current price of $39.
It is important to remember that we can keep selling put options, thereby lowering our cost basis further, until the ETF hits our stated price. If we did this over the course of a year we could sell puts on XOP approximately nine times for a total of $11.25.
Annualized that is a 31.3% return on the $3,600. Of course, this is a best-case scenario, but it could lower our cost basis from $36 to $24.75. One thing is certain: I would not buy a stock any other way.
Now you can start to see the true power of selling put options.
If you’d like to learn more about income-generating options strategies, please join me for a live income training event on Wednesday at 12 p.m. EST. Just click here to register for the event.