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. 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.
Jordan says
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!
Valerie says
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!
Jeffrey Foster says
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.
Chane Billow says
Hey guys, thank you very much for the feedback. It really means alot to me as this was my first article here. I plan to keep posting my original content here. Also, feel free to email me at optionssherpa@gmail.com if you would like to get my option trades in real time.