Here's Why I'm Selling Put Options On Paypal...And Getting Paid $240 To Do It
Are you selling put options yet?
If not, I'm telling you right now that you're missing out on one of the easiest and best ways to make extra income.
Don't know how?
Well, that's why I write these articles - to help you understand just how great it is.
Selling Put Options On Paypal
Here's why I'm selling puts on Paypal:
- I'm bullish on the stock, but looking to buy in at cheaper levels than its current price.
- Selling puts infuses my account with immediate upfront income.
- I get to choose all the terms of the deal, including what price to buy the stock for.
- The stock is sitting on support at the 50-day moving average.
For those who don't know about put-selling, I consider it one of the greatest trading strategies ever invented. Why?
Because I literally get paid cash upfront in exchange for my agreement to buy a stock I want at the price I want.
Yes, my promise to buy a stock can earn me money.
Let's look at a current price chart of Paypal (PYPL).
The stock currently sits at a price of $73.62 per share, from which it has recently fallen about 7% from its recent high of $79. It's also sitting on solid support at the 50-day moving average.
My goal is to buy it near the $40 level - an area so low you can't even see it on this chart.
If I can do that, it would represent a $33.62 per share discount to its current price, or roughly a 45% drop.
Right now, with the stock resting on the 50-day moving average and the MACD indicator being very low, it leads me to believe that we may see a pop in the stock price in the near future.
But if the stock goes up, I wouldn't be able to buy it at $40 like I want to. That would be fine, as I'd still get paid upfront regardless of which way the stock moves.
Most people who want to buy a stock cheaper than where it currently trades, would just place a limit-buy order with their broker and have them buy it if it falls down to their desired level, $40 in this case.
But since there's no guarantee that Paypal will fall back to $40, we can take the trade a step further and make a little money in the meantime.
Where's The Money?
By selling a Paypal January 18, 2019 $40 put option for $.48 per contract (splitting the bid/ask price in this option chain), I will receive $48 for every 100 shares I agree to buy at $40 per share.
Who pays me this money? The put-option buyer - that's the person who's taking the other side of my trade.
Since I'm looking to potentially buy 500 shares of Paypal at $40 (potential $20,000 investment), I can sell five option contracts and immediately receive $240 ($48 x 5 contracts) from the put option buyer.
Each option contract equates to 100 shares of stock, so you can sell as many put option contracts that meets your investment wishes.
Since I have no idea whether Paypal will fall to $40, I at least will get paid for my time and effort while I wait until the January 2019 expiration period to roll around.
The $240 that I will receive from the put-option buyer goes directly into my trading account and I can do with it whatever I please.
I'm making a promise today (December 29, 2017) to buy Paypal at $40 per share if it happens to fall to that level by January 18, 2019. In exchange for that promise, I receive the $240.
If Paypal is trading below $40 at anytime prior to and/or at expiration, then I will have to make good on my promise and buy my 500 shares at $40 a piece.
Even if Paypal is trading at $35 per share, I have to make good on my promise. But I'm okay with that considering that I think buying Paypal at $40 would be an incredible buy-in level.
If Paypal is trading above $40 at expiration, then the option trade will expire with no value and I'm left with keeping my $240. I won't get to buy any stock at that time, but at least I'll make some spending money.
Paypal's A Bull
Why am I bullish on Paypal?
For the sole reason of its current position in the payment processing sector.
It's already been a hit for small businesses and entrepreneurs for years (I use it too!), and I think with the "gig economy" gaining steam, Paypal will only become more popular and more profitable in the future.
Although I am bullish on Paypal, I understand that I may not be able to fully participate in any current upside movement if I don't buy the shares outright now at today's prices.
But that's okay, because I don't want it at today's prices. I want to buy it cheaper (if I can).
With the put-sale, I can collect $240 right now and wait to see what happens.
If it does undergo a pullback and I do get to buy the shares at $40, I can then ride it back up with my expected turnaround and sell covered call options to gain even more upfront income.
The biggest risk I have in this trade is if Paypal falls below $40 and keeps falling.
But, that risk is no different than any other shareholder who purchases a stock.
I'm confident that buying Paypal at $40 (if I'm lucky enough) will be a great long-term hold and I know what the risks are going in.
You're In Control
One of the best parts about selling put options is that you are in complete control of all the details going in.
You choose the stock, you pick the level in which you want to buy the stock (strike price), and you get to choose the length of the trade (expiration date). It's a win-win.
On the flip-side, if for any reason my outlook on Paypal changes, and I don't believe in its long-term potential anymore, I can always unwind the trade by buying back the put option.
This may result in a profit or loss, depending on where the stock is trading at that time.
With the typical 20% margin requirement assessed by my broker, I would need to hold aside roughly $800 for each put option sold, or $4,000 for my five contracts.
This is a great deal because I'm not required to put up the full $20,000 purchase amount unless I have to fulfill my agreement next January 2019.
I can use the extra $16,000 cash on hand to engage in other trades for my portfolio.
If Paypal ends up above $40 at expiration, I would keep my $240, and then I would repeat the trade and sell another round of put options, which would allow me to collect another infusion of upfront cash. More money in my pocket!
A few final words of advice if you're going to sell put options:
- Stick to high quality stocks. No high fliers.
- Make sure you have a true genuine interest in owning this stock for the long haul.
- Don't get in over your head. Only sell the amount of put option contracts that match your desired purchase quantity of potential future shares.
This is exactly what we do in our Smart Option Seller newsletter.
We find great stocks like Paypal and sell put options on it. We collect the cash and wait to see if we have to fulfill our promise and buy it at a really great price.
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