top of page

Like 3M? Here's Your 66% Discount...

In last week's blog post, I discussed the idea of getting paid for things you like to do.

One of those things was buying stocks.

If you like to buy stocks on the cheap, you can be rewarded for your time and effort.

This can be done by using the amazing technique of selling put option contracts, something we do all the time in our Smart Option Seller newsletter.

At the time of publication last week, 3M Corp (MMM) was trading near $172 per share, and the opportunity to collect a quick $203 was available in exchange for your promise to buy the stock at $135 per share by expiration time in January 2020.

Yes, you could get paid an upfront fee to buy 3M at more than a 20% discount to its current price. The only catch is that 3M would actually have to fall to $135 by January 2020 in order to buy the shares.

If it doesn't fall to $135, the $203 is still yours to keep, but you won't get the shares.

But that's ok, because selling put options in this manner guarantees a steady stream of constant income generation with an opportunity to buy great stocks at a much cheaper price. The odds are low that you will end up buying the stock, but the income collection will pad your trading account nonetheless.

Oh, You Want The Stock Now? Here's An Even Better Way

Take a look at MMM's current chart.

This is one of the most oversold stock charts I've seen in awhile. It's ripe for a climb back up.

Plus, MMM is a major blue-chip stalwart that won't be held down forever.

You might be thinking, "heck, I'd buy MMM right here it's such a good deal".

Well, if that's your thinking, let me show you a way to cut down your cash outlay by 66%.

Currently, MMM trades for $165.70 per share (as of 7/10/19). Buying 100 shares would cost $16,570.

But by using my other favorite options technique of buying deep-in-the-money (DITM) call options, it can cut down your capital outlay by $10,945 (66% discount).

How so?

In the option chain above for the January 2020 expiration, I've circled the MMM $110 DITM call option contracts.

Our secret is to always pick DITM call options with at least a 90% Delta or higher. The $110 strike fits that bill as its Delta is right at 90.14%.

DITM means the strike price of the call option is well below the current price of the stock. In this case, the $110 strike is $55 below the $165.70 stock price. And, the DITM options we choose will typically have a 90% Delta.

This guarantees the call option price will move in lockstep to the stock's price at a 90% correlation. If the stock rallies by $1 per share, the call option price will rise by $.90 per contract, and vice versa.

DITM call options act as a pure surrogate for the stock, so the movement will practically be same, with much less capital outlay, much less downside risk, and almost triple the returns.

The Beautiful Numbers

By buying the $110 call option for $56.25 per contract (splitting the bid/ask price), the cash outlay would be $5,625.

When buying option contracts, it's price must be multiplied by the 100 share multiplier ($56.25 x 100), as each option contract consists of 100 shares of stock. This gives the cost of $5,625.

So now you're controlling 100 shares of MMM for $5,625 instead of $16,570. There's your 66% discount.

As MMM rallies back up in price, the call option will tag along at a 90% correlation. You're getting practically all the same movement at a massive cash discount.

With that cash discount also comes less downside risk. If MMM goes belly up, the shareholders will lose $16,570 while the call option holders will only lose $5,625. Major piece of mind.

And the final kicker in all this is the return-on-investment (ROI) that can be enjoyed.

If MMM rallies back up to its recent high of $220 per share by January 2020, that would be a gain of $5,430 for the stockholders, and an ROI of 32.8%. Not too shabby.

The call option holders would realize a dollar gain of $5,375 and a ROI of 95.6%. That's almost three times the stock holder's return.

At expiration in January, depending on where the stock lies, the call option can be sold back to the market or can be rolled over to another distant expiration period.

DITM call options can be used as a substitute for any stock. With the money that is saved, it can be put towards buying other DITM contracts, or even towards 2.25% short-term CDs to offer guaranteed income.

In my 27 years of being an options trader, selling put options and buying DITM call options are two of the most incredible ways to navigate the markets.

Our Smart Option Seller newsletter specializes in put-option selling. That's all we do. Come give us a try. I guarantee you're missing out on a great way to generate more income. Just click here to learn more.

Until next time...

- Lee


Recent Posts
bottom of page