Buy Stocks on Sale by Selling Puts

Who doesn’t like to save money?  Who doesn’t like to get things on sale?  Why pay more for something than you have to?  Many of our larger purchases such as houses and cars are done following negotiations to decrease the price that we pay.  Why should investing in stocks be any different?  You may not think that you can get stocks on sale or pay less than the asking price, but let me explain how you can do this.

Have you ever thought about investing in a particular stock and thinking to yourself that maybe if it were just a little bit less expensive that you would buy it?  Have you ever watched that stock then proceed to gain another 30-40% in value and wonder why you just didn’t invest in it in the first place?  If you had sold puts on that stock, you could have benefited from the increased price without even owning the stock.  Let me explain how that would work.

Let’s say for example that you wanted to invest in Western Digital (WDC) stock.  You wanted to buy it at $25 per share but missed that opportunity.  You might be willing to buy it at $30 per share, but it is trading at $31.20.  You could wait until it declines back to that price, but you can’t be sure that it will.  Instead, you decide to sell the put with a $31 per share strike price that expires in 5 weeks.  You sell this for $1.60 per share.

What this means is that you have agreed to buy WDC stock for $31 per share, but you already received a premium of $1.60 per share which you can think of as a discount.  So, your real cost per share will only be $29.40 per share which is below the price at which you were willing to buy it in the first place.  If WDC falls to $30 and you end up buying it for $31, no big deal since the real cost is $29.40.  You actually will have gotten the stock at a discount and could sell at a profit even at $30.

Now, if the stock continues to climb and doesn’t get back to $31 for many months, you can still profit without even owning the stock since you would only be buying it if it traded below $31 per share.  If it goes to $35, you still make $1.60 per share profit which is a 5.4% profit (1.60/29.40) in 5 weeks.  Once this option expires, you can sell more puts on the same stock or can choose a different stock.  This same process can be repeated on a monthly basis for quite some time as long as the general trend of the stock remains in an upward pattern.  You could sell puts at the upward support line and continue doing that until the trend is violated buying back that last put for a slight loss.  In this way, you could benefit from a rising stock without ever owning it.