I often ask investors why they would pay full price for a stock when it can be purchased at a discount.
Stocks can be purchased at a discount using the technique of writing puts.
A put is an option contract.
The stock selected must be an optionable stock.
Using this strategy, the option seller will either acquire the stock at a discount or be paid for not buying the stock! Selling (writing) a PUT is a strategy used to collect the premium and sometimes used as a means of acquiring the underlying stock for less money.
The stock selected should be a stock the investor is willing to purchase.
The stock should be fundamentally sound and poised for an increase in value.
Technical analysis of the chart pattern should indicate a bullish trend is in effect or about to begin.
Writing a put requires an obligation on the part of the trader.
The put writer is required to purchase the number of shares contracted at the strike price selected, on or before contract expiration.
The put writer collects a premium for the sale of the option contract.
As long as the price of the underlying stock remains above the strike price, the option will not be exersized by the buyer.
The put writer will retain the premium paid, and have no obligation to purchase the underlying stock.
If the stock declines in value, the trader faces the possibility that the stock will be put to him.
In this case the put writer will be required to purchase the stock at the strike price selected.
However, the put seller will still retain the premium paid for the sale.
This scenario will result in the trader acquiring the stock at a discount to the selling price of the stock at the time the position was entered.
Although the objective was to collect the premium without having the stock put to them, it may be desirable to buy the stock if it is low enough in price.
This may result in a longer term trade.
The put writer may have to hold the stock until it appreciates in value to make the trade profitable.
The put writer wants the underlying stock price to rise.
If so, the stock does not have to be purchased.
The premium can be kept in either case.
The stock may be a desirable purchase at this price and will be purchased if it declines (drops under the strike price).
Upon selling the option, this premium is deposited into the investors account.
A writer of puts should have the cash equivalent of the strike price in reserve.
The broker may put a hold on the funds needed for the purchase.
Each brokerage firm may have different requirements on the cash needed for security.
The use of margin will increases the risk and reward of each trade.