Get Paid to Buy Stocks at Lower Prices – Selling PUT’s Explained

Options

Selling Puts (Options) can be used by a conservative investor to either buy stocks at a lower price or generate income during almost any market conditions. In this article I’ll talk about buying stocks at a lower price.

Summary

  1. As a conservative investor, you can get paid to buy your favorite stocks at lower prices.
  2. Using Apple stock as an example, the current price was $109.34/share, I wanted to buy it at $105/share, I made $116 in 2 weeks waiting for it to drop.
  3. In this case it did not drop to $105, so I got to keep the $116 and try again. If Apple would have dropped to $105 or less by my Expiration Date, I would still keep the $116, and my order would have been processed for 100 shares of Apple @ $105. My actual cost for the Apple stock would only be $103.84 ($105 less $1.16).
  4. This process is quite simple, it’s called “Selling a Put” option
  5. One Options Contract is 100 share of stock

Here is how it works: 

Selling a Put – This pays you an immediate Premium ($$) for agreeing to buy shares at a future date (Expiration Date) at a specific price (Strike Price). You cannot lose the premium, you get it immediately posted to your cash account. The Put allow you to buy your favorite stock at a lower price and get paid until it hits your price. Selling a Put is also called “Writing a Put”.

Here is what a Put contract looks like in your account. This contract is AAPL 160408P105, it looks cryptic but it’s actually easy to understand. AAPL (the stock) 160408 (Expiration Date of 04/08/16), P105 (means a Put with a $105 Strike Price).

apple.png

Here is what a Fidelity order entry screen looks like.

Order Entry

  1. The top portion shows the current stock price for Apple (AAPL).
  2. The Action is “Sell to Open”, this means you want to open an options position, by “selling”.
  3. Quantity is the number of Options contracts, keep in mind that an options contract is always 100 shares of a stock. 1 contract = 100 shares of Apple.
  4. Pick an Expiration Date, this is when the contract will expire, on these kind of trades I usually keep the date to 3 – 6 weeks.
  5. Strike (price) is the price you’d like to buy the stock at, in this case I’d like to buy 100 shares of Apple at $105/share, it was $110.32 at the time.
  6. Notice the Bid and the Ask Price. This is the amount of premium you will get, you’d like the highest amount you can get. I always use a Limit Order and wait for a decent price.

In my next post I’ll discuss how to use Selling Put’s as a way to make additional income, assuming you don’t want to actually own the stock, just collect the premium on each trade.

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