In last week’s The Rich Investor I discussed the idea of getting paid for things you like to do… like buying stocks for cheap. You can be rewarded for your time and effort using the amazing technique of selling put option contracts, something we do all the time in our Instant Income Alert service.
At the time of publication last week, 3M Corp (NYSE: MMM) was trading near $181 per share, and the opportunity to collect a quick $300 was available in exchange for your promise to buy the stock at $145 per share within the next eight months.
Yes, you could get paid an upfront fee to buy 3M at a 20% discount to its current price. The only catch is that 3M would actually have to fall to $145 in the next eight months for you to buy the shares.
If it doesn’t fall to $145, the $300 is still yours to keep, but you won’t get the shares.
That’s okay. Selling put options in this way guarantees a steady stream of constant income generation with a bonus opportunity to buy stocks at a much cheaper price. The odds are low that you will end up buying the stock, but the income collection will pad your trading account nonetheless.
But You Want The Stock Now? Here’s an Even Better Way
Take a look at MMM’s current chart.
This is one of the most oversold stock charts I’ve seen in awhile, thanks to the current market meltdown. It’s ripe for a snapback rally.
Plus, 3M is a major blue-chip stalwart that won’t be held down forever.
You might be thinking, “Heck, I’d buy 3M right here it’s such a good deal”.
Well, if that’s the case, let me show you a way to cut down your cash outlay by 68.5%.
Currently, 3M trades for $175 per share. Buying 100 shares will cost $17,500. But, by using my other favorite options technique of buying deep-in-the-money (DITM) call options, it can cut down your capital outlay by $11,990 (68.5% discount).
In the option chain above, for the January 2020 expiration, I’ve circled the MMM $120 strike DITM call option contracts.
Our secret is to always pick DITM call options with at least a 90% Delta or higher. The $120 strike fits that bill as its Delta is right at 90%.
This guarantees the call option price will move with the stock’s price at a 90% correlation. If the stock rallies by $1 per share, the call option price will rise by $0.90 per contract.
DITM call options can act as a surrogate for the stocks, so the movement will be same, with much less capital outlay, much less downside risk, and triple the returns.
The Beautiful Numbers
By buying the $120 call option for $55.10 per contract (splitting the bid/ask price), the cash outlay would be $5,510. When buying option contracts, it’s price must be multiplied by the 100-share multiplier ($55.10 x 100), because each option contract consists of 100 shares of stock.
So, now you’re controlling 100 shares of MMM for $5,510 instead of $17,500. There’s your 68.5% discount.
As MMM rallies back up in price, the call option will tag along at a 90% correlation. You’re getting practically all the same movement at a massive cash discount.
With that cash discount comes less downside risk. If MMM goes belly up, the shareholders will lose $17,500 while the call option holders will only lose $5,510. Major piece of mind.
And the final kicker in all of this is the return-on-investment (ROI) you can enjoy.
If MMM rallies back up to its recent high of $220 per share by January 2020, that would be a gain of $4,500 for the stockholders, and an ROI of 25.7%. Not too shabby.
The call option holders would realize a dollar gain of $4,490 and a ROI of 81.5%. That’s more than three times the return on just holding the stock.
At expiration in January, the call option can be sold back to the market to lock in the gains, or the trade can be rolled over to another distant expiration period.
DITM call options can be used as a substitute for any stock you’re thinking of buying. With the money you save, you can buy other DITM contracts, or even 2.25% short-term CDs to offer guaranteed income.
In my 27 years of being an options trader, selling put options and buying DITM call options are two of the most incredible ways to navigate the markets.
Give ’em a try!