for $25 a share,
Cisco (Nasdaq: CSCO)
at $16 or
Microsoft (Nasdaq: MSFT)
for $20? And imagine not only buying these or anystock at a much
lower price, but actually get paid to do so? Is this simply too
good to be true?
I know it seems like a dream, but sophisticated investors
accomplish this on a regular basis.
Let me show you how...
Limit orders: You set the price
The average investor accomplishes buyingstocks lower than the
current asking price by using alimit order .
By specifying a chosen share price, your order isn't filled
until the stock dips to your set price. If the stock never reaches
your limit order price, then you get to keep yourmoney . The
downside is that it can take forever for the stock to dip to your
price and you don't get paid for waiting. Also, limit orders often
cost slightly more commission than traditionalmarket
orders from most stockbrokers .
But the method I am about to reveal actually pays you for your
time spent waiting for the price to dip.
The best part? If the share price never hits your buying level,
then you get to keep the money you were paid to wait. This tactic
is simple and easy to follow with the worst thing likely to happen
is that you need to purchase your desired stock at your chosen
The way this method works is by selling aput option at thestrike
price you want to buy theshares .
Oneput option equals 100 shares of stock, so you sell one put
for every 100 shares of stock you want to buy at the strike price
of the put. As the put seller, you then immediately receive the
proceeds from the price of the put asprofit .
Then, one of two scenarios can happen.
1. The price of the stock stays above your chosen
If this happens, then you simply get to keep the premium for the
put option and are not forced to buy the stock.
2. The price of the stock drops to the strike price of
In this case, youwill buy the stock at the strike price, getting
the price you wanted in the first place, not to mention you still
get to keep the money you received for selling the put, thus
lowering the overall cost of your trade.
Let's take a look at a real world example...
You want to buy 1,000 shares of Cisco at $16 a share (the
currentmarket price is about $20). Therefore, you need to sell 10
Cisco Februaryputs at the $16 strike price at the present cost of 9
cents per put. This means each put is worth $9 and 10 puts is
This $90 is wired immediately into your account.
Now comes the waiting game.
Should Cisco dip to $16 a share or below, then you will be
forced to buy the 1,000 shares at $16 each. Remember, you have the
$90 put premium to apply toward the purchase price. Therefore,
rather than costing you $16,000 to purchase the 1,000 shares, it
now costs $15,910 when you include the $90 put premium. This means
Cisco can drop all the way to $15.91 a share before yourinvestment
If Cisco never falls to $16, then you don't get to buy the
shares at $16, but you get to keep the $90 put option premium as
payment for your waiting time.
Risks to Consider:
There are verylimited risks to selling puts with the intention
of buying the stock at the strike price. However, as with any other
investment, share prices may keep going lower, resulting in losses
even with the cushion of the put premium. Always invest within your
risk parameters and know when to close a position before the loss
gets too big for your strategy.
Action to Take -->
Selling puts to buy the stock at the strike price is a
time-tested strategy that works. If you have any questions
regarding options, then I strongly suggest studying the
Option Industry Council's website
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