Tuesday, February 18, 2014

Another Way to Making Money in the Markets - Pt #1

Is there a way to make money in the market besides dividends and interest.  Another option to make money in the market is to sell puts. An an investor or trader sells a put, they are obligated to buy  the underlying stock if the stock falls below the strike price prior to expiration of the option. An investor can used this idea in a couple of scenarios.
First Scenario : An investor that is bullish on the stock can sell a put and collect the premium. The maximum profit from this occurs when the price of the stock stays above the strike price.  The break even point for the investor and trader  is  occurs at (strike price - premium that was collected.

In the above image, the strike price is  $25.00 and the option premium is $5.00. So the break even point is therefore $20.00. Basically the profit decreases at the strike price. As the stock price falls as indicated in the above diagram the amount of profit decreases.

Second Scenario

If an investor wants to invest in a stock but wants to buy it had a cheaper price. They can make money why they wait. For example, if Johnson and Johnson (JNJ) is trading at $50.00 currently and I want to buy it at $45.00. An investor can sell a deep out of the money put and collect the premium. So if the stock stays above $45.00, the investor will make maximum profit which is the premium minus the commission. If JNJ falls below $45.00, the investor will buy the stock at the strike price. So the investor wins by buying the stock at a cheaper price which means their yield on cost will be higher as the stock is purchase at a lower price.

An investor should only sell naked puts when they are willing to own the stock in question. Naked means the investor does not own the underlying stock. An investor needs to get permission to sell puts from their broker.

This is a high risk as the stock can go to zero theoretically.

My next post will go into another way to make money besides dividends.

Photo Credit : mozcool.com


     I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.  Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk


  1. Hi IP,

    some years ago, I have traded a lot with warrants!
    In Germany there are some datas:
    Delta, Theta, Vega and so on...
    I don´t know, if the definitions are the same like in the USA.

    It was unbelievable to make 100% in only 3 or 4 weeks!
    But - the higher the profit, the higher the risk!

    Now, I´m only buying shares... :-)

    Best regards

    1. Dividenden-Sammler,

      I heard of warrants but I didn't do any research into what they are.

      Delta, Theta, Vega and others are used here in Canada also and probably every where. In my case, options have this listed when you go to see a option quote. If these do not appear right away, columns can edited to show them.

      Selling put options when you want to buy a certain stock at a lower price allows an investor to receive a option premium (income) why waiting. I have never did this before, but I assuming if the option is exercised, the the option premium is subtracted from the strike price, lowering the adjusted cost base. The risk is that the stock could go to zero.

      From an investing perpective, options could be used for insurance (buying a put), extra income from a stock (covered call) and waiting to buy a stock at a cheaper price (selling a naked put)

  2. Hi IP,

    I think in Germany you can´t buy options at the exchange.
    You can only buy and sell warrants.

    Short sales on shares are only recently become possible in Germany.

    But OK - now I´m only an investor - and no trader any more.
    John Murphy will forgive me! ;-)

    Best regards