Your Guide To More Cash In 2019 And Beyond...
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.