Stock Market Savings

Long before we purchase the stock, and along the way as it is rising, there are still other things we can do to take advantage of the “magnified movement” in the option price.

As the stock rises and gets close to the $15 strike price, the value of the put goes down. If it’s awhile before the expiration date and the option is going for 50cent, we could buy it back. What does this mean? We buy a $15 put for 50cent. Now we have the right to sell the stock at $15. The option costs $500 for ten contracts (plus commissions). You’re now creating a “wash” situation. You sold 10 puts, now you’ve just bought 10 puts and to your broker’s computer it’s a wash. They both go off the screen. You now have no obligation to perform.

You would only buy back the puts if there is plenty of time before the expiration date for the stock to go back down. If the stock is near $15 and climbing, or above $15 with a small chance for a significant decrease, don’t buy the put. Just wait for the option to expire and you get to keep the whole $2,000. Your profit, if you buy back the $15 put for 50cent ($500 for ten contracts) is $1,500. Don’t unnecessarily spend money you don’t have to. However, let’s keep going. What if there is still plenty of time before the expiration date and the stock has shown a lot of volatility? It’s at $15.50, the put options are 25cent, you spend $250 to buy them back. You have a clear profit of $1,750, minus commissions. Now, the stock falls back to $14. At this time the $15 puts are going for $1.25. You sell another ten put contracts and generate $1,250, then one of the following happens.

1. The stock stays down. Your basis is now $12 ($15 minus $3: $2 for the original put sold, minus 25cent for the put buy-back, plus $1.25; the selling of the second $15 put). That is a super wholesale price.

2.    The stock rises above $15. You get to keep the premiums and you have no further obligation.

3.    If there is still time to buy back the put again, try it again—repeat the process. Note: I’ve done two puts, but never three in one month. It’s possible, but highly unlikely. The stock would have to be really volatile, having a lot of quick movement. Look at the following charts and plays:

We sold puts at $15 and the stock went way up. We also had calls on this play.

A good cov­ered call stock can also be a good one for sell­ing puts. We sold the $10 puts, then the stock hit $19. Profit $1,000.

We sold the $15 puts. We ac­tually  got  the stock put to us, but I like this company  and don’t  mind owning   the stock.

Sell Call—Buy Put

Sell the call for $1.50 ($1,500 if you purchased ten con­tracts) buy the put for 25tf. Capitalize on each—depend­ing on the time left before expiration—at the optimum time. Buy back the call or let it expire and sell the put at a profit.

Once again, so many more opportunities open up when you sell than when you buy. Don’t misunderstand; I still make most of my money buying calls—on pure option plays. I try, however, to sell as many calls and puts as I can.

Remember, writing covered calls is a great strategy for IRA’s and other pension-type accounts.

Generating income, infinite returns, buying stock whole­sale, double-dipping with highly volatile stocks (selling two calls or puts in one month)—are just so much fun.

Now look at the following charts to see possibilities. I added arrows to show the buy and sell ranges.

Opposite

Buy a put, sell a call.

Sell a put, buy a call.

Look at how many opportu­nities a volatile, but upward-trending stock options.

And on and on…

Read the following example: you find a stock that is rolling, rising from $13 and bouncing off $16. It’s down to $13 and is rising quite rapidly. When it hits $13.50, you sell the $15 put for $2. Ten contracts equals $2,000. Nice cash flow.

Now, when the stock gets to $14.75, the put is going for 50g. You buy it back at a cost of $500. You get to keep the $1,500 with no further obligation. However, why not cross over and sell the $15 call? Do this when the stock is at $15.50 or $15.75. Yes, it might rise or stay above $15 and you’d have to buy the option back at a small loss, but the $15 premium could easily be $1 to $1.50—another $1,500 of income. Remember, check the charts. This one is moving rapidly. It may go under $15 and you’ll have a second premium—yours to keep. Now as it dips down and starts up, repeat the process.

True, when it’s above $15 and you think it’s going down you could do a pure $15 put purchase play. And yes, when it hits $12 or $13 you could do a pure $12.50 call or $15 call purchase play.

You could even do a double play.

1. Sell a $12.50 put and buy a call when the stock is at $13 when you believe it’s on the way up. The premium will be about the same. However, as the stock rises, the money you received for selling the put looks better because the put value goes down (remember, you sold it when it was nice and high). At the same time your call premium goes up in value. Sell the call now for a profit and keep the profit for selling the put, or even buy back the put while it’s low. Wow, I can’t wait for the market to open tomorrow. And yes, we can wax philosophical all day long—hey, if I have to potentially buy the stock at $15 and I’ve purchased the right to buy it at $15, what if it’s close? Your brain might catch on fire.

2. Sell a call and buy a put when you think a stock may go down a bit. This way you pick up the nice call premium. If you own the stock, you won’t get called out. The dip is offset by the rise in value of the put option premium. You can sell the put option at a profit.

If you don’t own the stock, you keep the premium for selling the call and then get to sell the put at a higher price when the stock goes down. This is a form of hedging, and what a hedge it is!

Now, don’t make this too complicated. You’ve read about rolling stocks and rolling options. You’ve heard me teach about peaks and valleys. You’ve heard of some straddles— buy a call and put on the same stock, same month, same strike prices, and wait for a big move either way. Well, I call this a side-straddle. A calculated, predictable way to capture the up movement, or the down movement—TWICE.

I cover this more extensively at the Next Step Wall Street Workshop. You’d be smart to be there. Call 1-800-872-7411. These seminars sell out, so call now. Note: the Next Step Wall Street Workshop is only available to Wall Street Workshop graduates, or people with more stock and option experience. Come to the “BBQ.”

Sell Put—Buy Call

If you sold the put for $2.50 ($2,500) and bought the call for 25*2 ($250), you would have a net in of $2,250. Now, as the stock increases, you can either buy back the put or just let it expire (in most cases). The call could now be sold for $1.50 or $1.75, generating more income.

Okay, here we go. A stock is at $13.50. You really like the company. You think this stock could easily go to $18 or $20. You think this because:

1.    The stock is rolling between $13 and $20, and has done so frequently. You know this from looking at its chart.

2.    You have heard good news from the company— i.e., new products, expansion, great earnings, et cetera.

You could buy the stock or buy the $12.50, $15 or even $17.50 call options. If the stock rises as expected, the value of your investments increases. Both of these choices require an expenditure of money. If you buy the stock on margin, you only have to put up a percentage of the money (in most cases 50%). I bring this up here because margin requirements will be necessary when selling puts—see the section on “cash requirements.”

Let’s not buy the stock or call options. Let’s sell a $15 put, or even the $12.50 put, if you think the stock may go down further. What does this mean? Let’s use the $15 put example first. If you sell a $15 put, you are literally committing yourself to buy the stock at $15. You no longer have just the right (as in buying an option), you now have the obligation to perform, if the stock gets “put to you.”

You see, by writing a put (selling), you have given someone the right to sell you the stock at $15. They don’t know who you are—all they have done is purchase a put option—giving them the right, not the obligation, to sell the stock to someone at $15. When would they do this? When the stock is below $15. Now, if the stock is at $14.75 or $14,875 on the expiration date, it’s iffy whether or not it will get put to you. (See “Selling Calls” in the Wall Street Money Machine for more information on the execu­tion of these close orders.) However, if the stock is at $14 or $13 it will get put to you at $15.

What did you get for selling the put? And when will you get the cash? The premium you receive is determined by how far the strike price is in the money or out of the money, and how long until it expires.

I know this sounds ambiguous but it’s important to realize that there is not just one time to get out. If you have invested $2,000 in ten contracts of a $2 option and one hour later it shoots up to $3 or $3,000, you have an hour profit of $1,000. If YOU’RE HAPPY, then get out. Take your profits and go to a movie.

Of course you shouldn’t get out if there’s more potential, but if this was initiated as a quick play, then take your profits and look for another deal—dips, new stock splits, et cetera. So what if it goes to $4. The next day it could be at 50tf.

Stocks and options are like ocean waves. They ebb in, they flow out. Nothing stays the same.