Put Options: The Smart Way to Buy by Chad Shoop, The Sovereign Investor
The ability to name your own price for an item you want is a remarkable way to shop. It gives you a sense of control and guarantees you are not overpaying. It’s worked for travel specialist Priceline for years and insurance company Progressive is taking a stab at it as a way of getting your insurance premiums under control.
What’s even better than paying the price you want is getting paid while you wait for the price to fall to your target.
Honestly, it sounds too good to be true, but it’s not.
It’s a strategy called selling put options. Very few know it exists in the market today, and even fewer take advantage of it.
But I believe selling put options will change the way you look at the market. Instead of being forced to pay a high price today or wait and hope it falls to a price you want, you can get paid instantly by simply agreeing to buy it at a price you name.
It’s that simple.
To explain how it works, let’s consider a market everyone is familiar with — the housing market.
Get Paid to Wait
To be clear, this is a strategy to implement as a way to purchase stocks and collect income, but since real estate trades similarly to the stock market, it’s a clear analogy and something everyone can relate to.
Before you bought your current home, there was a price you were willing to pay to obtain it. Let’s keep it simple and say the home was worth $250,000, but you were willing to pay only $200,000.
Instead of checking every day to see where the price of the home is at and if you wanted to make an offer, you could set up a contract — in this case an option contract.
With that contract, you would agree to buy the house for $200,000 if the market value of the home fell to that price or lower during a set amount of months — let’s say four. By agreeing to buy this home for $200,000 over the next four months if the valuation falls, the owner would pay you upfront cash, maybe $6,000, or 3% of the full value.
That cash is yours whether or not you end up buying the home at the agreed upon price of $200,000 because the home owner is using this contract to protect himself from further losses.
In four months, that contract expires.
If the price of the home is still above $200,000, nothing changes. You keep the $6,000 you were paid and the contract is no longer valid. That’s where the beauty of agreements like this come to play. You still don’t have the house you want, but you can start the process all over again. You can sign another agreement and collect more instant cash to put in your pocket, all while agreeing to buy a home you already want to own for the price you want to pay.
Sounds fantastic… but there is a catch.
If the market value of the home falls to $150,000 over those four months, you still have to fork over $200,000 for the house, leaving you with negative equity — but you keep the $6,000 regardless of the outcome, which helps to offset any loss.
Therefore, your risk is no different than if you owned the home, as the value could fall below the price you were already willing to pay.
Generate Regular Income
It would be amazing if this scenario played out for everything we wanted, such as TVs, cars, clothes and food.
But, this exact scenario is available in the stock market today. It’s a concept known as selling put options — and it’s one I have perfected in Pure Income.
I use this strategy to generate significant gains, roughly 15% to 25% consistently for those trading in a margin account, and 3% to 5% for those using cash.
This past Friday, there were two option contracts that expired in my portfolio.
Even though we were unable to buy shares at the price we named, we did keep the cash we collected, earning a 19% and 21% yield based on a margin account in just four months.
You can see how repeating these trades three times this year would net you about a 60% gain on an annualized basis — not a bad return for agreeing to buy a stock you want at the price you named.
Editor, Pure Income