Your favorite stock just dropped 8% and you want in, but you’re nervous it could dip even lower over the next few days. What do you do?
Sell a cash secured put.
It’s a way to own a stock you want to own, but at a price much lower than you expected to own it at.
The Portfolio Strategy
The straightforward price order to buy a stock at a lower level is common if it can be determined where it is comfortable to get in below current prices. Put in the trade at “X” and wait for the dip to enter. However, this is often difficult to impossible in a highly volatile market condition. Good news is there is a smarter way.
Only sell put options on stocks you want to own
Have the funds in the account to buy the stock at a discount if a selloff continues.
The intention is to be assigned the stock, each option represents 100 shares, as a long-term investment. Paying in full ensures that no additional money is needed to hold for potentially many, many months or even years until price recovery.
Sell either of the front two option expiration months to take advantage of time decay
Collect premium every month on put sales until assigned shares at a cost-reduced basis. Every month that you keep the premium it is money affectedly subtracted from the entry price.
Professional money managers have certain points at which they would buy a desirable stock, but an option strategy lets them get in at discount or even get paid not to own the stock. Let me explain.
Selling a cash secured put,has the same mathematical risk profile as a covered call, which would assign the stock long at the option strike price. Meaning, you get to own a stock a the strike price of the put options you sold. If you want to own the stock then buying it a discounted value is even better. Having our cake and eating it too is when the true entry basis is actually even lower with the subtraction of the premium you collected when you sold the option.
When you sell a put option there is an obligation to buy the stock at the strike price if it is assigned.
However, if the stock is not below the strike at expiration the premium received is all profit. Get in the stock at a discount or get paid not to.
