This is a simple stock buying strategy. Most investors buy their favorite stocks without knowing about this simple stock buying strategy. But do you know this fact that the famous investor Warren Buffet uses this stock buying strategy regularly. Not only Warren Buffet uses it but other hedge fund managers also use this simple stock buying strategy on regular basis that includes Carl Icahn who uses this strategy frequently. Do you know this Microsoft is buying LinkedIn for $26 Billion?
Most investors simply buy stocks without giving any consideration to the fact that they can make money while buying stocks. In this simple stock buying strategy first you identify the stocks that you want to buy. When you have identified your list of favorite stocks, you implement this stock buying strategy. Suppose stock ABC is in the list. It is selling at $55 per share. You look at the charts and it is very clear that this stock is going down and the price can hit $45. Instead of buying ABC shares at $55 per share, you will buy ABC shares at $45 with this simple strategy saving $10 per share. Not only saving $10 per share, you will also make some money when you buy this stock. Know these 8 rules for picking perfect stocks. Below is an infographic that explains this simple stock buying strategy.
How To Buy Stocks By Writing Put Options on Them?
This is how you are going to do it. You will write put stock options on ABC shares and sell them in the market. Simple. Most investors are already familiar with stock options. But they only know how to buy them as put or call options. Most of the investors have never thought of selling stock options themselves. But most banks and hedge funds do it on regular basis.
You see when there is bad news about a company, put stock options on that company shares become hot in the market. Everyone thinks that the company shares will plummet in the next few months and they buy put stock options on that company shares. When they buy put stock options they pay a premium which becomes your income. Suppose ABC shares are expected to go down. There can be many factors. But for this post we suppose the company ABC is a solid company but market analysts are expecting a bad quarterly earnings report. This is a sure catalyst for sending the share price down.
You write put stock options for $45 and sell them in the market. As said above, right now ABC shares are selling at $55 per share. So you sell put options that expire in 2 months with strike price of $45 per share. At the end of 2 months, 2 things can happen. ABC shares did not go down below $50. Your stock option expires worthless but you still made money by selling it. The other thing that can happen is ABC shares go below $45 per share. Suppose ABC shares are trading at $41 per share at the end of 2 months. So you are now obligated to buy these ABC shares at $45 per share according to your put stock options contract.
You buy ABC shares are $45 per share instead of $55 per share and save $10 per share plus you also made money by selling stock options. Suppose you plan to buy 1000 ABC shares. Suppose you had sold the put options for $2 per contract. Each options contract covers 100 shares. You plan to buy 1000 ABC shares requires you to sell 10 put options contract. These 10 contracts made $2000. You saved $10K by buying ABC shares at $45 per share instead of $55 per share. You total savings is $12K. Not bad hub?
This was a simple explanation of this stock buying strategy. Everything depends on your technical analysis and market timing. Warren Buffet never buys stocks without doing a thorough fundamental and technical analysis of the company. For example, he has invested heavily in Coke shares. He didn’t buy them right away. He bought Coke shares in batches over the years when the price was right according to his analysis.
This is what Warren Buffet does. First he evaluates the company thoroughly. He calculates a intrinsic value of company shares that he believes the shares should be selling in the long term. If the share price is above the intrinsic value, it means the company is overvalued and in the near future the share price will go down to the intrinsic value. After having done his thorough analysis he sells put stock options for that company shares. This is how he gets a fair bargain most of the time. Buying stocks at a low price is what makes your portfolio appreciate over time. Warren Buffet made $3 billion in year 2009 with this simple stock buying strategy. Learn a low risk options trading strategy by Chuck Hughes.
When you use this strategy, always remember you will have to buy the stocks that you are selling the options. So always sell options on those stocks that you want to buy. Never use this strategy in a lackluster manner on stocks that you never intend to buy or you have never analyzed thoroughly. Selling stock options is a full subject. Before you implement this strategy, you should do some reading on how to sell stock options. Volatility is an important factor in pricing of these stock options. Options premium is highly dependent on the stock volatility. When the volatility is high, options premium can become very high meaning you can sell options contract at a much higher price. So in our above example, we sold the options contract for $2 but with high ABC volatility you could have sold it for $5 making $5K from selling the options.
Sometimes This Stock Buying Strategy Will Cost You More Than Planned
Now everything is not always honky dory. Most of the time this strategy will work. But times can come when stock price falls a lot more than you had anticipated. For example ABC shares fall and reach $20 per share. In this case you will still be obligated to buy ABC shares at $45 per share. In this case you are buying stocks at a price which is $25 per share above the market price. This can happen sometimes. You should keep this in your mind when using this strategy. If this happens you will be losing $20K. With $2K premium that you earned your net loss is $18K. Learn how to use volume to confirm a stock price trend.
If this happens, you should write a call options contract with expiry 2 months this time for $50 per share and sell it in the market. Since ABC shares had fallen a lot in the last few months and the implied volatility is high, the chances of ABC shares making a recovery is high. Let’s say you again get $2 per contract. So you net $2K as options premium. If after 2 months, ABC shares are trading at $30 per share. you options contract expires worthless. Your loss is now $16K. If ABC shares are trading at $50 per share, you can sell your stocks and make a profit of $5 per share. Whatever these are all hypothetical examples for illustrative purposes.
The point of this post is that selling options is a strategy that works most of the time if you plan your strategy well. Of course black swan events cannot be ruled out but if you do your analysis well the chances of black swan appearing will be small.