Like 3M? Here's $203 To Buy It...
Many of us have hobbies and interests.
For instance, I love listening to music and going to concerts.
I've seen many great acts over the years - Elton John, Billy Joel, Prince, the New York Philharmonic, and even my local high school band (they're really good!).
But one thing many of these fun activities have in common, is that they cost money. Yes, some are free, but a majority require payment.
Wouldn't it be great if we could be always be paid for the extracurricular things we like to do?
Well, I just so happen to know of a way we can all get paid for doing something many of us
Put-Selling = Money
It's no secret I'm a huge fan of option trading. Heck, I've been doing it professionally for 27 years now.
My favorite strategy? Without a doubt, it's selling put option contracts.
Because I get to collect tons of cash just for my decision (hobby) to buy a stock.
How does that even work?
It's simple. Since I have an interest in the stock market, I like to buy stocks that I feel will reward me with dividends and upward price appreciation.
And when I decide to invest in a stock, I don't actually buy the shares at its current price.
I choose a level at least 20% below the current price and sell the corresponding put option contract.
When trading options contracts, there's always two players - a buyer and a seller.
The put-option buyer is expecting the stock price to fall and is willing to speculate on that decision.
The buyer must pay the entry fee to participate in that wager. It's called the "premium", and goes right into the pocket of the put-option seller.
In exchange for the seller receiving the premium, he or she must commit to buying the stock at the agreed-upon level, called the "strike price".
What level is the strike price?
Any level, you as the put-option seller, decides on.
You make the call and decide where you would like to buy the stock.
For me, as I said above, it's typically 20% below where the stock currently trades.
Once I decide on my level, I sell the put option and collect the cash.
Let's look at an example.
Buying MMM = MMMoney In Your Pocket
I have an interest in buying 3M Corp.
It's recently dropped about $60 per share (with a slight recovery) over the last two months. This huge drop is part of the reason why I'm so interested. It currently sits near $172 per share.
Here's its current chart.
I feel it's still very oversold and due for the eventual climb back higher. Plus, it's a stalwart of a company and holds a spot on the coveted "Dividend Aristocrat" list.
Dividend Aristocrats are companies that have raised their annual dividends each year for at least 25 years. MMM has raised theirs for an incredible 61 years in a row. That's a solid company in my book.
But I'm not interested in buying it at its current bargain price of $172. No, I want even more of a deal.
Using my guideline of 20% off, I would entertain the idea of buying it at $135 per share.
How could I buy it at $135 when it currently trades at $172?
But I can contract myself out ahead of time to buy it at $135 if it happens to fall to that level in the future.
Sure, I could just sit and wait, hoping that it'll fall to $135. But there's no guarantee that it will.
Selling put options is a better way to go about this.
The above option chain shows a sampling of MMM put option contracts that expire in January 2020.
I've circled a few choices to highlight some of the payouts that are possible at various strike price levels.
By selling a put option contract with a $135 strike price for a January 2020 expiration date (example only!), I can receive a guaranteed upfront payment of $203 today (splitting the bid/ask price).
If MMM falls to $135 at the end of the expiration period, I will uphold my end of the bargain and buy 100 shares at $135 a pop. If it doesn't fall to $135, I will walk away with the $203 and move on with my day.
Since every option contract consists of 100 shares of stock, the put option prices you see in the chain must be multiplied by 100 to get the actual dollar amount. For the $135 put options, it would be $2.03 x 100 = $203.
If your interest is to potentially buy 500 shares at expiration, then you could sell five option contracts and receive $1,015 today. If MMM falls to $135 at expiration, you would need to have full payment of $67,500 ready to be deployed to pay for the shares.
If MMM doesn't fall to $135, you keep the $1,015 and move on.
And whether the chosen stock falls to the desired level or not by expiration, the upfront payment is always yours to keep.
What is the put-option buyer getting out of all of this?
Does it matter? Not really.
They're just speculating that the price of the stock will fall from its current level.
If it does, good for them. For the put-option seller, your only interest is how much you will get paid upfront and whether the stock will fall to your desired buy level by expiration.
Interested in buying MMM at $160 per share instead of $135?
Well, based on the chain above, you could receive a fat $682 upfront for your commitment to buy 100 shares at $160 a piece by expiration in January 2020.
Or even the lowly $80 puts have $.26 of fair value. Put option buyers are paying out $26 for each option contract purchased. It also means they're speculating MMM will fall to $80 by January 2020. That's more than a 50% drop from its current value in six months! That's insane! Could be the trade of the year.
This is why I love put-selling.
Fair warning - although receiving the upfront cash is nice, always make sure to sell put options on stocks you have a genuine desire of possibly buying. Because in the end, you may have to follow through. Don't sell put options just to receive the cash. That's a no-no! Stick to high quality and stocks you like.