Sunday, May 25, 2014

One Solution to a Rising Market

The stock market seems to be rising and rising. As an investor, it is more difficult today to find stocks that are deemed undervalued. How can an investor make money in this rising market? If a stock that you are interested is trading higher than what you willing to pay, an investor can still make money on this by using options.

An investor can make income by selling a put option.  A buyer of a put pays a premium for the right, but not the obligation, to sell 100 shares at the strike price before or on the option expiration date. The seller of a put gets paid the option premium up front for the promise, or obligation, to buy 100 shares at the strike price before or on expiration date.

So lets say, shares of fictional company XYZ is currently trading at $46.00, and you are willing to buy 100 shares at $45.00 . You look at the option table for that stock for a $45.00 strike price. Since you are selling a put, you look at the bid price. If you do a market order, this is the premium you will receive. So, in this case you would receive $100 in premium directly into your account.  If the stock price goes up, the seller keeps the premium. If the stock price goes sideways but stays above strike price, the put seller keeps the premium. If the stock price falls, the put seller is PUT the 100 shares of XYZ at the strike price plus still has the premium which lowers his or her cost basis.

3 Scenarios When selling a PUT OPTION
Note : Commissions were not included above for simplicity.

The risk of selling puts is that the stock can go to zero.  The maximum profit when selling a put is the premium minus the commission. Selling puts allows an investor to be paided why trying to buy a stock at a cheaper price. If the investor is PUT the stock, then they become owners of the stock and are now LONG the stock.

An individual must ask for the option level permission from there broker in order to be able to sell puts. So, this past week I was granted permission (Option level 4 ) from my broker to sell puts within my margin account. 


     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

No comments:

Post a Comment