What could be better than getting paid for something that you like to do?
Are you a roller coaster buff? If so, then it's like being paid to go to Disney World to ride Big Thunder Mountain.
Love skydiving? Great. It's like someone paying you to jump out of an airplane.
So, how does this relate to the stock market?
Well, do you have an interest in buying stocks?
If so, how would you like to get paid to buy stocks $25 cheaper, $50 cheaper, even $100 cheaper than where they currently trade?
If yes, then excellent, because there are many people who will pay you cash upfront to do it.
Don't know how?
Then you haven't been reading my blog posts.
I've shown on multiple occasions that selling put options is your key to not only getting paid cold hard cash, but it allows you to potentially buy any stock you want for any price you want.
How Does It Work?
Let's say your goal is to get exposure to the whole market. Buying shares of the S&P 500 via the SPDR exchange-traded-fund (SPY) is a great way to do it.
But you really want to buy it at a bargain - not at its current price of $288.60 per share.
Looking at the weekly chart below, you decide that $190 per share is your ideal price. That would be a three-and-a-half year low, and almost $100 per share cheaper than its current price. It's also so low that you can't even see it on the chart.
The last time SPY was at $190 was in early 2016.
Since its current price is $288.60, obviously no one is going to sell it to you now at $190. But that's not a problem, nor a hindrance, to getting an immediate upfront cash payment.
Above you will see a sampling of put option prices for SPY that expire in March 2020.
I've circled the $190 strike row that shows a current value of $.70 bid/$.75 ask, with a fair middle value of $.72 per contract.
What does that mean?
The "strike" describes the level at which you could potentially buy shares of SPY in the future.
By selling one $190 strike put option (hypothetical trade!), you are agreeing to buy 100 shares of SPY at $190 per, between now and March if called upon to do so. In exchange for your agreement, someone will pay you $72 today.
Since each option contract represents 100 shares of stock, multiplying the $.72 per contract value by 100 yields your $72 upfront payment - called the "premium".
In essence, you've contracted yourself out to buy SPY at a price of your choosing in exchange for an upfront payment.
What Happens Next?
1. If SPY closes below $190 at the March expiration day, then mission accomplished.
You will follow through on your agreement and buy the 100 shares. This will require full payment of $19,000. Plus, you keep the $72.
The only way you would be able to buy the shares at your desired price of $190 is if SPY actually falls to that level by March. Yes, that means SPY would have to fall almost $100 in price.
2. If SPY closes above $190 (the more likely outcome) at expiration, your contract will expire and no shares will change hands. You keep the $72.
At this point, the process can be repeated by selling a new put option (establishing a new buy level), and receiving a fresh influx of upfront cash to your account.
Where Does The Money Come From?
You might be thinking - who pays me this money?
It's from other speculators in the market, specifically, the buyers of those put option contracts.
When someone buys a put option contract, they are expecting the price of the stock to fall.
In the example above, they're banking on SPY moving lower.
If that happens, the value of the put option will go up in price, allowing the buyer to sell it for a profit.
Options can be traded just like stocks. If it moves in the right direction, it can be offset, which locks in the gains.
But if the stock moves in the wrong direction (higher), the put option will lose value, giving the put option buyer a loss.
As far as the put-option seller goes - it doesn't matter if the stock goes up or down. You will get paid an upfront premium regardless. If the stock moves lower, then the chances of you having to follow through on your agreement goes up.
This is a good thing though, as you will be able to fulfill your wish to buy your chosen stock at your chosen price.
All the put-option seller needs to do is sit and wait to see where the stock ends up at expiration.
Looking At It Through Another Lens
There's another way to look at this kind of trade though if you're the put-seller.
The put-option seller can do the same as the put-option buyer - that is, offsetting the trade before expiration, as well.
Just like an option buyer who can offset a trade by selling it for a higher price, the option seller can do the same, just in reverse.
A put-seller can buy the option back at a cheaper price than what it was originally sold for.
For instance, let's say we sold the SPY option for $.72 per contract.
A few months later, the SPY rallies, putting downward pressure on the put option price, placing it near $.12 per contract.
The put-option seller could purchase the option back at $.12 and lock in a $.60 per contract gain.
That represents an 83.3% decline in the value of the option since it was first entered.
I call this my "80% Rule", and in my newsletter advisory - Smart Option Seller - we always take profits and lock in gains when we reach the 80% threshold.
When doing this, it offsets the initial trade and the contract ceases to exist. We no longer are bound to the agreement to buy the shares of SPY at $190 per.
But this is fine for us as we're making good money along the way by collecting all the locked in income.
In fact, since Smart Option Seller's inception in January 2017, we've yet to purchase any stock, but that's fine with us. Our accounts are growing regardless as we collect the upfront premiums.
Are There Risks?
All investing strategies come with risks. Can't get around that.
In the case of selling put options, your risk is the same as any stock holder - that the price of the stock can move lower than your buy-in level.
Let's say you're lucky enough to buy the SPY at your desired price of $190 per share.
You're happy as a clam because you waited for it to fall almost $100 in price before pulling the trigger. You feel like you got a great deal.
But what happens if SPY keeps dropping? What if it falls to $170 or $160 per share?
Well, you'll have a paper loss unless you sell and lock it in for real. Or, you can continue to hold and wait to see if it goes back up.
The good thing about selling put options with such a large cushion between the stock price and the strike price ($190 vs $288.60), is that most likely the stock won't fall that far in the first place, and the chances of buying the stock will be very diminished.
That rings true in our Smart Option Seller newsletter, as I mentioned earlier, that we have never had to buy any shares of stock. This is because we take great care to choose stocks and strike prices that have such a wide cushion between each other, that it makes the chance of buying the stock very small.
In the end, selling put options is a fantastic way to make money on an investing activity that many of us enjoy.
We'll either get to buy quality stocks at rock-bottom prices or we won't. Either way, we still get paid. It's a win-win!
Sounds good to me.
How can you get started? Come join us!