Today, I’m sharing a great strategy for getting paid to buy a stock.
And no, I’m not just talking about sitting in a stock and waiting for dividends.
Instead, I’m writing about a very straightforward type of trade that anyone can deploy to set up a stock buy and immediately get a credit to your brokerage account to do it.
This is a common strategy that is used every day by all sorts of traders from the mega-fund fellows to folks just like you and me.
But before I do this, I want to make sure that you are getting involved with the trades for this week on our Watchlist.
To get the full company and trade details on each and every one of them, click here.
Now, let’s get to the details on how to get paid to buy great stocks…
Put Your Trades Here
Let’s say you are in the market to buy a house.
After months of looking, you find your dream house. There’s just one problem.
The house is listed for $600,000. But you only have $500,000 to spend.
You decide to talk to the homeowner anyway.
You explain to him that while you love the house, you can only pay $500,000 for it – not his full $600,000 asking price.
The homeowner kindly declines your offer. But he is willing to make a deal with you…
If you are willing to keep your offer on the table for three months, he will pay you $20,000.
At first you are taken by surprise. The deal seems too good to be true.
Worst case, you don’t get the house, but you keep $20,000 just for being willing to buy.
Best case, you get the house for only $500,000 price AND you keep the $20,000.
Why would the homeowner offer you such a sweet deal?
It sounds like a fairytale, right?
It’s not.
In fact, deals like this take place every day in the stock market.
This is the concept behind selling naked put options.
The term “naked” simply means that you do not own the underlying stock.
So, you sell someone the right to “put” the stock to you at a set price – a price below where the stock is currently trading.
Investors are always a bit scared. They want security.
And they are willing to pay for a safety net that will protect them from large losses.
They do this by buying put options.
But in order to buy those options, they need a seller – someone willing to take the other side of that transaction.
And if you are in the market to buy the stock, selling put options is a way to get those shares at a lower price.
Put Option Primer
Here’s how it works…
Let’s say you want to buy AMC stock. As of Wednesday morning, it trades for $45 per share.
Instead, you sell the AMC October $40 strike put option.
It trades for $4.00 per share. Since an option contract represents 100 shares of stock, you receive an instant $400 credit in your account.
On Oct. 15, when the option expires, one of two things will happen.
If AMC stock is above $40, the option will expire worthless. Your obligation to buy will go away and you will keep the $400 – no strings attached.
If AMC stock is below $40, the option will be executed, and you will receive 100 shares of AMC at $40 each. But… you still get to keep the $4.00/share you took in by selling the option.
So, your cost basis will be $36.00 per share – a full 20% below where it is trading today.
If you were going to buy the stock anyway, it’s a good deal.
Heads you get free money, tails you get a lower price and free money.
What’s the Catch?
So, what are the risks? There are two.
The first is opportunity risk.
If AMC skyrockets to $100 this month, you will have missed out on the move. You’ll still make 10% on your money, but not the 122% you would have made owning the stock.
On the other side of the coin, AMC could fall below $40 by the time your option expires.
You have some cushion with the $4 you received selling the put, but if the stock is below $36, you will be holding the shares at a loss.
The loss will be much smaller than if you bought at $45, however.
Selling options is an income strategy.
I have a friend who manages over $100 million using a similar approach with an impressive track record.
On the stocks you end up buying, you can then sell call options against them to make money on the selling side too.
But that’s a topic for another day, so stay tuned.
Embrace the Surge,
Ross Givens
Editor, Traders Daily Direction
