Today I am analyzing the possibility of selling a put to buy a stock that I particularly like. I am already very familiar with the process of selling puts and how to get a credit that I will pocket no matter what happens with the option itself.
What fascinates me the most of purchasing stocks this way, is this idea of getting the stock at the price that I want, regardless of the current price in the market. This allows me to define my price for the companies that I’d like a head of time, and then placing orders for getting those companies said those prices, while getting a premium for doing this.
Thus time around I’m trying to study and analyze how much percentage the credit will represent on my capital. It is true that the capital will be invested in the stock if the option executes, but what I’m particularly looking for is to know what percentage annual return for my capital I get. That means the premium that I get for selling the put, compared with the capital that I have to preserve in my account to be able to buy the stock. This income (premium) must be so it can return something worth of my time, the time that I’m gonna be waiting for the put to expired or get executed.
The particular stock that I like it’s trading today at 20.35 and I would totally love to get to buy that company for less than 20 bucks per share. So we are pretty close to my ideal purchasing price.
What is the next step
I’m looking forward to selling a put so I can buy the company at 20. The one that I line is currently selling in the market for around $.70 and expires in 141 days, meaning that I am going to get $75 for each $2000 that I tie of my capital.
All of this accounts for a premium obtained against my capital representing 8.39% income on capital. There is one way of looking at this premium in percentage terms: I’m going to get 8% return on my capital while I’m waiting for the stock to go below 20.
What is going to be happening with the put
Typically in the options world you have to analyze the two different outcomes that you are going to go through: What happens if the stock goes above your strike or below your strike. We’re going to do exactly that now:
If it goes below my strike, meaning that the option will get executed, this would fulfil my intention of purchasing this stock at the price that I wanted and keeping the stock for the future.
In the other scenario, if the stock flies away and move to the upper side far away from my strike, that means I get to keep a premium for which I had to wait 141 days until the option expired worthless.
It comes at the end of the day to be either of two ways: I buy the stock that I like at the price that I like, or I earn 8% annually on my savings.
This is where the whole idea of selling a put option to purchase a stock makes sense to me. The ability of guaranteeing a percentage of savings on your capital while you wait for the company to be sold at the price that you like, this is priceless.
is this good enough?
now that I know I can get a percent on my money, I have to compare this against other investment possibilities. So, I would naturally raise the following question:
Can I obtain more than 8% annually putting my money anywhere else?
I think the answer to this question is always a yes. You can certainly get more percentage gains doing some thing else with your money. But it comes at a price: Time. The time that you need to invest on any other type of investment or business to get more than 8% annually may be considerable. Whereas with selling a put you’re literally sitting and not doing anything for the next 141 days in this case.
I will continue exploring possibilities for purchasing this stock and evaluating other options at different strikes and expiration dates. Hope to come back with more ideas soon