Option Series #2 Put Selling

Conversation with client...

Client:"I see that ABC company is trading at $50 a share. I love the company for the long term but feel that they are currently over- valued at this level.  If it sinks to $40, I think it would be a bargain and accordingly, I would like to place a GTC (good till canceled) limit order to buy 100 shares at $40."

Decision Investments: "Sure Mr. Client...Would you like to get paid TODAY  for your order?"

In our second series on investing with options we would like to introduce the strategy of "Put Selling".  When an investor sells a put, he or she receives an up-front payment to stand ready to buy a stock at a given price for a given period of time.  It can be a very lucrative strategy and it  can also be implemented in a manner that greatly reduces risk as compared to simply owning the underlying stock. 

Like a covered call strategy, selling  puts can provide downside protection  and furthermore  you choose the price level at which you are willing to step in and buy the underlying stock (the put "strike price").  Among other benefits of the strategy, you hold onto your cash while waiting to see if you get "exercised" or if the stock will be "put to you". You won't receive the dividend of said stock like in the case of a covered call but you may leave your cash in a high yielding money market fund or wherever you'd like.  Conservative investors should  avoid buying more securities with the cash because if the market declines your losses will be leveraged and when the stock is put to you it could result in your account being on margin (having a negative cash balance). 

Put selling can be a great opportunnity to pick up quality companies "on sale", add substantial income to your portfolio AND reduce the risk of an equity portfolio.  What's not to like? Really, please give us your comments and feedback.