Buy High Quality Stocks At A Discount
Let me ask you a question…
How do you buy high quality stocks at a discount?
Most investors simply wait for the stock to fall to the price they want to buy it. Some investors will enter a buy limit order with their broker. And that’s fine.
But there’s a better way to buy stocks at a discount.
You see, if you set a buy limit order, your broker sets aside money in your account to purchase the stock. If and when it does fall to that price, your buy order will get executed.
Here’s the problem…
The stock may never fall to your buy price. You could easily tie up a large chunk of your trading capital in buy limit orders waiting to be executed.
To make matters worse, you’re not earning anything on the money you’ve set aside. And you’re also missing out on the profits you could be making if you had the money invested in another investment.
Clearly, there are some drawbacks to waiting around for a stock to drop to the price you want to buy it. Selling put options is a better way to buy stocks at a discount.
They give you a way to pin-point the price you’re willing to buy a stock and they pay you to wait for the stock to fall to that price. That’s a win-win scenario!
Here’s how it works…
Selling a put option obligates you to buy the stock at the strike price of the put option. And as the seller of the option, you immediately collect the option premium.
Let’s say you want to buy 100 shares of IBM (IBM). Today IBM is trading for around $185 per share, so it will cost you about $18,500. But you’d like to pay closer to $170 per share.
By selling the IBM $175 October 2012 put for $5, you will immediately collect $500 in option premium.
If IBM falls below $175 before the option expires in October, you’ll be assigned 100 shares of IBM at a cost of $17,500. But don’t forget, you already collected $500 in option premium when you sold the options. So your total cost to buy 100 shares of IBM is only $17,000 or $170 per share.
However, if IBM doesn’t fall below $175, you won’t get the shares. But you’ll still get to keep the $500 in option premium you collected when you sold the option. So at least you’re getting paid to wait for the stock to fall to the price you want to pay.
As you can see, selling out-of-the-money put options on stocks you want to own is a win-win. Either you get to buy the stock at a big discount or you get paid to wait.
***Editor’s Note*** For those of you who love tiny biotech stocks, you should know that Robert is releasing a new recommendation on Thursday in his Biotech Supertrader newsletter. Why am I pointing this out here?
Because this is the 3rd time in 2 years Robert is recommending this stock! The first time, his subscribers closed it out for a 114% gain. The second time they closed it out for a 136% gain. I’d say Robert definitely has his pulse on this stock! Click here to see what his newsletter is all about– and how you can get in on the 3rd go-round of this amazing stock!
Good Investing,
Corey Williams
Category: Options Trading
