If You Are Thinking About Buying a Stock, Stop and Think About This First

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.

Photo Source