People Really Pay For Those Things?


That's the question I always get when I explain the strategy of put-option selling to my friends.


Why would they ask me something like that?


Consider this scenario:


A brand new 2019 Mercedes-Benz E 300 4MATIC series sedan will run upwards of $65,000.


What if someone offered you $1,000 cash upfront to buy that vehicle for $10,000? Would you?


It's a weird offer I know, and you'd be skeptical, I'm sure.


But what if it was legit and there were no strings attached and there was nothing wrong with the car. You would even get the manufacturer's warranty to give you peace of mind.


Now it sounds more intriguing, right?


The question you would probably ask is - why would someone make me an offer like that?


Well, as far as I know, offers like that don't exist in the car industry, but they do it exist in the stock market all the time.


Consider this actual scenario that really happened...


In 1993, Warren Buffett wanted to buy shares of Coca-Cola (KO). At the time, it was trading for $39 per share.


Buffett decided that $39 was too expensive. He only wanted to pay $35 per share.


What were his options?


1. He could wait to see if KO would drop to $35, which there was no guarantee it ever would.


Or


2. He could sell a $35 put option contract that would obligate him to buy 100 shares of KO at $35 each, while receiving an upfront cash payment in exchange for his agreement.


By choosing option #2, someone would actually give him an upfront cash payment to buy shares of a company he wanted to buy at the price he wanted to buy it for.


It's just like trying to buy the new Mercedes at a vastly reduced price, but yet someone would pay you to do it.


So how did Buffett's trade turn out?


Well, since he wanted to buy 5,000,000 shares of KO at $35 per, he ended up selling 50,000 put option contracts (each option contract = 100 shares of stock) for $1.50 each.


With the $100 option multiplier, he received $150 ($1.50 x 100) for every put option contract he sold.


By selling 50,000 put option contracts, he received a whopping $7.5 million dollars. Yes, $7.5 million!


That's $7.5 million he gets to keep regardless of whether he has to follow through and buy the shares of stock. Money in the bank!


With this agreement, the only way he would be able to buy shares of KO at $35 is if KO actually fell to $35 (from $39) by the time the option contracts expired (all option contracts have an expiration date).


In the end, shares of KO actually went up from $39, not down, by the expiration date.


And although Buffett didn't get to buy his 5,000,000 shares of KO at $35 per, at least he walked away with $7.5 million in his pocket.


Pretty sweet consolation prize.


This is why you need to sell put options like we do at Smart Option Seller.


We pick quality stocks we want to buy. But we don't want to buy them at their current market price.


We decide on a cheaper price to buy them which equates to a level of extreme value.


We then sell put options that match our desired buy level and we get paid cash upfront for our agreement.


Most of the time the stock never falls to our desired buy level, so we just walk away with the cash in hand (like Buffett) and move on to the next trade.


It's an income producing strategy that we repeat over and over again multiple times throughout the year on multiple stocks.


And in the off-chance that we end up following through on our agreement to buy the shares, we could watch it rally and reap unlimited reward potential.


Consider this scenario:


Walmart (WMT) is trading for $97.59 per share. Would you like the opportunity to buy it for $47.50, more than half off its current price? And get paid cash upfront, as well?


Take a look at its current stock chart below:


This is a 5-year chart of WMT going back to March 2014. You can't even see the $47.50 level it's such a low price.


Like many savvy investors, you should be jumping at the chance to buy the biggest physical retailer on the planet for more than half off its current price.


If WMT hasn't been below $47.50 per share in over five years, why would you think it would fall that far in the next ten months?


What you see above is a sampling of WMT put-option contracts that expire on January 17, 2020 – roughly 10 months from now.


I’ve circled the current bid and ask prices for the $47.50 strike put options.


The strike price represents the level in which you would potentially trade WMT shares with the other person.


And what else does it tell us?


It tells us that someone is willing to pay approximately $0.15 per contract (splitting the bid/ask) for that put option.


Since each option contract is worth 100 shares of stock, you’d get an immediate infusion of $15 ($0.15 x 100) into your account from the put option buyer as soon as you make the sale.


If you sold five contracts, you’d get $75. For 10 contracts, you’d get $150 (and so on).


But why is this important?


Because anyone buying those $47.50 put options is predicting that WMT will fall to $47.50 per share by January 17, 2020.


And when someone wants to speculate on a stock moving lower, they can buy put-option contracts. To do that, they pay the entrance fee (the premium) to the put-option seller – you!


People Really Pay For Those Things?


This is when I typically get that question.