The “Free Money” Strategy: Cash Is King When Selling Put Options
Tuesday, May 5, 2009
by Karim Rahemtulla, Investment Director, Smart Profits Report
“Cash is king,” as the old investment adage goes.
Question is: How do you go about getting it - especially in a tough climate like this one? After all, cash is only king if you have it.
In today’s column, I’m going to show you how to squeeze cash from the stock market - without really having any to begin with.
Yes, you read that right - money from next-to-nothing.
But before you embark on this “free money” strategy, you have to have an implicit understanding of what you are doing, because there are no free lunches on Wall Street for those who don’t do their homework.
But for those who do, this is the freest lunch you’ll find…
A Moneymaking Strategy For All Markets
Let’s say you have an ordinary stock portfolio. Even if it’s full of stocks that aren’t doing much, it still has value. You might not think so as you watch it stagnate, but it does.
You just have to harness the right strategy that will allow you to take advantage of the current market conditions. But in fact, this strategy actually works well in all market conditions.
It’s called put-selling.
- Basically, you sell a put option on a stock to a buyer at a level well below the current price.
- And when you do, that buyer pays you money into your account immediately - yours to keep, no matter what, and spend however you wish.
- Be careful, however. In return for accepting that money, you’re obligated to buy the stock at the designated put option strike price if shares hit that level at options expiration.
An 8-Step Put-Sell Trade Example On General Electric
Let me give you a put-selling trade example, so I can walk you through the 8-step process and terminology… Let’s assume you like General Electric (NYSE: GE).
- With the stock currently trading around $13, you’re interested in selling puts on the shares at a level that you think GE would be an attractive buy. Let’s say that level is $7.50.
- Your next step is to check out the company’s options chain (a listing of all the available put and call options on the stock, with symbols and prices).
- For the sake of this example, you see put options with a $7.50 strike price, which expire in July. They’re trading for $0.40 on the bid price (the price at which a buyer is willing to buy) and $0.50 on the ask price (the price at which a seller is willing to sell).
- Your entry price - be it $0.40 or $0.50 - must be multiplied by 100 to give you the actual price or cost because each options contract consists of 100 shares of the underlying stock.
- So you decide to sell 10 GE July $7.50 put option contracts (that’s equivalent to 1,000 shares). By doing this, you’re saying that if GE closes at $7.50 or below by expiration in July, you’ll buy the shares at $7.50.
- And for taking this risk, you’ll be paid $400. That’s because when you sell 10 contracts at $0.40, you’re getting 40 cents per share, multiplied by 10 contracts. That’s $400. This money is yours to keep, regardless of what the shares do.
- If GE hasn’t fallen to $7.50 or below by expiration in July, your obligation ceases.
- And at any time before that you can reverse the trade by buying back your puts. You’ll be able to do this for less in two cases.
- The first case is if the shares trade at the current levels and expiration is approaching, as the time value of the premium decreases as expiration approaches (this is commonly known as time decay).
- The second case is if GE moves higher, which means the options price will also decrease, as the risk is diminishing. That means the probability of GE shares moving to $7.50 is also decreasing.
The Free Money Strategy - 3 Keys To Selling Puts
At the end of the day, when you sell puts you follow a set of rules that will ultimately allow you to get money for nothing. And there are three keys to doing it right…
- Choose companies that are not in danger of going bust. The higher the risk, the higher the premium - and the higher the chance that you’ll be forced to buy the shares.
- Only choose companies and strike prices that would give you the best bargain in the world if the shares get put to you. There are a lot of companies out there that are extremely attractive at the right price.
- If a position moves in your favor, close it out early. This is all about making money and reducing risk.
For more information on put selling, my colleague Lee Lowell, a former NYMEX trader and bestselling author makes put-selling recommendations exclusively for readers of his Instant Money Trader service. And since its inception last November, he’s cruising along with an unblemished track record: No losses and a string of winners.
Here’s what H.S., one of Lee’s readers had to say about a recent trade: “I just joined Lee Lowell’s service last week and have already collected $1,800. I can only imagine how great 2009 is going to be!”
Feel free to take a no risk, no obligation look at the Instant Money Trader here.
Karim Rahemtulla
Related Articles:
Put Option Selling: How To Buy Stocks At A Discount & Get Paid For It
Two Ways To Make Money From Market Volatility
What To Do in a Volatile Market
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2 Responses to “The “Free Money” Strategy: Cash Is King When Selling Put Options”
Due to the amount of comments we receive Smart Profits Report will not be able to respond to all questions. By submitting your comment you agree to adhere to our Comment Policy.
Got something to say?
I purchased this product; I thought it was superb; I didn’t follow thru for a couple of reasons and asked for my money back.
But this article, about which you asked for comments, was extremely well written and very clear. In the future, I will re purchase the product and trade.
Make note:
If you sell puts you do have to have a decent amout in your account otherwise you will not be able to do this.
J