Stock Market Savings

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.

You just purchased this stock for $13. You see, your cost basis is adjusted by the premiums you’ve received for selling the put. If you’ve ever wanted to buy wholesale, you’ve done so. You’ve taken in $2 for selling the put and now your $15 purchase price is adjusted by this amount and you have a $13 cost basis. Just think, this stock could be selling at $14.50. You could take the stock and sell it immediately and have a $1,500 profit. You could also:

1.   Hold onto the stock for awhile. Remember, you thought this stock was going up. Is the story line still true?

2.    Sell a covered call on all or part of the stock. You could now sell a call option at a $12.50 or $15 strike price, or wait for the stock to strengthen and sell the $15 call option for more money (hoping to get called out or not) or even the $17.50 strike price if it moves up a lot.

3.   Go short on the stock, so you don’t have to actually purchase it. I’ll explain this later.

One thing I learned from my real estate days is that if you buy wholesale, all kinds of good choices present themselves. You can sell immediately and your payments are lower so you can rent at a profit, et cetera. The same is true with stocks. You have good choices if you buy wholesale.

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.

Most of my stockbrokers are so busy they won’t do this strategy, however, the ones who really watch out for my best interests, will.

WANGO means Watch And Get Out. Let’s say a stock is having a nice run up. You are quite profitable on your option but want to get out at maximum profit. Ask your stockbroker to keep an eye on it. If it peaks and you can catch it at or near the peak, then you can get out with an even greater return.

An example: the stock was at $80 after a slam, or other bad news, or even after good news. It goes to $81. You call your stockbroker and buy the $80 calls for $3 and the $85 calls for $1.25. The stock goes to $83, then $84, and one hour before the market closes it’s at $85—almost $86. The stock hangs around $86, seems to have stalled, backs off to $85.50 with 10 minutes before the close—this is it—(yes, there is tomorrow but this is today). Carpe diem. Seize the moment. Sell and take your profits. The $80 call is $6.25 and the $85 call is $3.75. That’s a $3.25 profit on the $80’s and a $2.50 profit on the $85’s. It’s been a nice day.

Yes, it may still go up tomorrow, but many times they fall back. This stock had a 3%, then 4%, then 5% run up in one day. Surely I can’t tell you what to do, but I usually take my profits and wait for another dip.

Two more points:

A. The options market closes ten to fifteen minutes after the stock market. If you are willing to buy at the ask and sell at the bid (buy or sell at the market), you can still trade options at 4:05 pm, 4:10 pm, sometimes even 4:15 pm (Eastern time). Why do I bring this point up here? Many times, stocks go up or down a few dollars right at the close. If the options have a corresponding move, you could get out at a higher price or get in at a lower price.

However, unless there is really spectacular news (good or bad) which comes out over night, the options are usually pretty much the same the next morning. Just once in a while, I do option trades after the stock market closes.

B. If you have a good profit you could sell part of your position and keep part active. You don’t have to sell all four contracts you’ve purchased. Sell part to capture some profits now and keep some to cap­ture larger profits later.

You might even be profitable enough on the ones you’ve sold to regain all the money spent on all four contracts—you now own the two contracts you’ve kept, for free.

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.