What could be better than getting paid for something you want to do?
Like riding roller coasters?
Then it’s like being paid to go to Disney World to ride Big Thunder Mountain.
It’s like someone paying you to jump out of an airplane.
But how can you do this in the stock market?
Well, if you love buying stocks $25 cheaper, $50 cheaper, even $100 cheaper than where they currently trade, then I have the answer for you.
There are investors willing to pay you cash upfront to do it.
How Does It Work?
Let’s say your goal is to get exposure to the whole market. Buying shares of the S&P 500 via the SPDR exchange-traded-fund (SPY) is a great way to do it.
But you really want to buy it at a bargain – not at its current price of $259.
Looking at the weekly chart below, you decide that $160 per share is your ideal price. That would be a five-year low.
Since its current price is $259, obviously no one is going to sell it to you now at $160.
But that’s not a problem, nor a hindrance to getting immediate payment.
Below is a sampling of put-option prices for SPY that expire in September 2019.
I’ve circled the $160 strike row that shows a current value of $0.63 bid/$0.65 ask, with a fair middle value of $0.64 per contract.
What does that mean?
The “strike” describes the level at which you could potentially buy shares of SPY in the future.
By selling one $160 strike put option, you’re agreeing to buy 100 shares of SPY at $160 per, between now and September. In exchange for your agreement, someone will pay you $64 today.
Since each option contract represents 100 shares of stock, multiplying the $0.64 per contract value by 100 yields your $64 upfront payment – called the “premium.”
Essentially, you’ve contracted yourself out to buy SPY at a price of your choosing in exchange for an upfront payment.
What Happens Next?
Well, if SPY closes below $160 at the September expiration day, then mission accomplished. You will follow through on your agreement and buy the 100 shares. This will require full payment of $16,000. Plus, you keep the $64.
The only way you would be able to buy the shares at your desired price of $160 is if SPY falls to that level by September.
But, if SPY closes above $160 (the more likely outcome) at expiration, your contract will expire, and no shares will change hands. You keep the $64.
Where Does the Money Come From?
You might be thinking – who pays me this money?
It’s from other speculators in the market, specifically, the buyers of those put-option contracts.
When someone buys a put-option contract, they’re expecting the price of the stock to fall. In the example above, they’re banking on SPY moving lower.
If that happens, the value of the put option will go up in price, allowing the buyer to sell it for a profit.
Options can be traded just like stocks. If they move in the right direction, they can be offset, which locks in the gains.
But if the stock moves in the wrong direction (higher), the put option will lose value, giving the put-option buyer a loss.
In the case of a put-option seller, it doesn’t matter if the stock goes up or down. You will get paid an upfront premium regardless. If the stock moves lower, then the chances of you having to follow through on your agreement go up.
This is a good thing though, as you will be able to fulfill your wish to buy your chosen stock at your chosen price.
All the put-option seller needs to do is sit and wait to see where the stock ends up at expiration.
But What If Put-Option Selling Is Not for You?
Of course, put-option selling is not everyone’s cup of tea… and many investors using their 401K money to invest cannot play in the options space.
If this is you, don’t sweat it.
On Tuesday, February 26, my colleague John Del Vecchio showed you how to become a $10 trader, and how you can amass a half-a-million-dollar fortune with some of the market’s cheapest stocks.
You can learn more about how to become a $10 trader by clicking here.