By: Jeremy Biberdorf
April 27, 2015
I am a simple man, and I like Bank of America (BAC) this year. We all know interest rates have been low for a long time and we all know they are going to rise. It is only a matter of when. We also know that banks do well when interest rates rise because they make more money on loans – which is their business.
I was a stock broker and trader for some of the largest online brokerages in the U.S. like TradeKing Inc., Zecco and others. I always knew that people could be much better off by using just this one simple trick to get more cash and a lower cost basis on the stock they were going to buy anyways.
Lets say you want to buy 100 shares of BAC. That is a $1600 investment roughly. You like BAC at $16/share and you want to buy it now.
STOP!!!
Instead of just buying BAC at $16, sell a little something called a “Put”. Let me give you a real life example. A put is an Option contract that gives the buyer the ability to sell 100 shares of BAC to you at $16/share if he chooses any time before April 20.
You SELL this Put in the market (I will show you a real life video of exactly how this is done later) for $50 each. You want to buy 100 shares of BAC, so you sell 1 Put and get $50 immediately deposited into your online brokerage account.
A quick note, anyone can sell Puts in your online brokerage account. M1 Finance fees for trading are $0, which makes it super easy. You only need to apply for options trading if you haven’t already, and make sure the level you apply for has the ability to sell “cash covered puts”. Your broker will give it to you, it is not hard to get and it takes about 2 minutes.
OK, enough of that. Back to the good stuff.
You just got $50. Yay!!! Nothing is free right, so what does this actually mean?
If BAC goes below $16 per share before April 20, you get what you originally wanted, which is BAC at $16 per share. The person who bought this Put from you is going to make you buy the shares at $16. You are fine with this because that is what you wanted anyways.
But since you also got the $50, that means that your cost basis per share has just dropped to $15.50 per share! (Do the math – $50/100 shares = .50 cents. & $16 -.50 cents = 15.50)
So, you just ended up buying BAC for $15.50 per share instead of $16. Nice.
What if it ends up above $16/share? Then you keep the $50 and that’s it. You get no shares of BAC, but you got $50, which is the same as buying BAC at $16 and those 100 shares going to $16.50! Also, Nice!
If you still want to get those shares of BAC, you can turn around and sell another Put and do this over and over again.
Related Investing Product Reviews:
Related Links
- How to Use Moving Averages in Trading: A Detailed Guide
- Day Trading Terms: Your Guide to Essential Terminology
- Essential Day Trading Rules: A Beginner’s Guide
- Insights Into Value Investing Strategy
- Year-Over-Year: Why Investors Must Understand This Common Phrase
- Five Investments That Preserve Capital, Reduce Risk
- 2 Easy Ways to Use Arbitrage to Make Money in the Stock Market
- Complete Beginners Guide to Closed End Funds
- Why a Roth 401K Plan Makes Sense For You
- Understanding Market Timing and How to Profit from It
- 4 Overlooked Benefits of A Roth IRA
- 4 Alternative Investments That Will Make You Money
- Critical Reasons To Invest In Small Cap Stocks
- 4 Reasons Why Preferred Stocks Are Smart Investments
- Do You Know the Secret Costs Of Mutual Funds
- 6 Concrete Reasons Why Smart Investors Own Gold
- 3 Easy Investing Tips to Lower Your Taxable Income
- How to Use Opportunity Cost to Grow Your Wealth
- Irrational Exuberance: How to Cash in When Others Are Losing Money
- How to Use Behavioral Finance to Your Investing Advantage
- Investing Is Not A Zero-Sum Game – Leads To Money For Smart Investors
- Dollar Cost Averaging: The Simple Investing Strategy That Works
- Using The Power Of The 80-20 Rule For Larger Returns
- Picking the Best Growth Stocks for Your Portfolio
- Dividend or Growth Stocks – The Best Investment
- Goldilocks Investing Is On the Wane
- The Trials and Travails of Investing
- 8 Vital Mindsets Every Budding Investor Must Have
- 5 Risk Reducing Tips Every Newbie Investor Should Know
- Investing in an Aging Population
- When It Comes to Investing, Debt Isn’t a Bad Four Letter Word
- The Secret IRA Your Advisor Doesn’t Know About
- So You Think You Know the Stock Market
- Investment Strategy is Not One-Size-Fits-All
- 4 Killer Strategies You Need When Investing For Retirement
- 7 Irresistible Tips You Can Use to Invest $10,000 This Summer
- Thinking About Buying a Stock? Stop & Think About This First
- How to Become a Full-Time Investor
- An Investing Strategy That Works
- Why Dividend Growth Investing Works
- Is Your Retirement At Risk?
- Pros and Cons To Investing In The Stock Market Today
Really good explanation of how stocks work. It can seem pretty overwhelming when first getting into it, so it’s good to have a resource like this. Thanks for sharing!
I had never thought of buying a put before, but you make a valid point that buying a put is the smart way to buy stock. You actually make money from simply buying stock. Thanks for explaining it in simple terms!
Excellent post on how to use options effectively. So many people either over complicate them with wild spreads and multi leg strategies, but over look their uses for trading around low volatility stocks like BAC. Options attract a lot of people due to the potential for high percentage wins, but they have so many more beneficial uses than the occasional home run.
Hey guys, thank you very much for the feedback. It really means a lot to me as this was my first article here. I plan to keep posting my original content here. Also, feel free to follow me if you would like to get my option trades in real time.