Today’s issue is dedicated to income…
Now, I often talk about how you can get paid to buy stocks . . . so much so that many of you have requested that I create some sort of educational series.
The strategies are simple, real and more importantly a great source for earning income on a monthly basis.
Today’s special Strike Price issue is Part 1. It focuses on using put selling to buy the best stocks at the best price.
The strategies are a great source for earning more income every month.
But right now, I want to talk about my favorite income strategy: selling puts for income.
There are so many advantages to using this simple strategy of selling puts to buy stocks you want to own. Again, selling puts for income is a safe and reliable way to bring in income, but some investors simply use the strategy to lower the cost basis of their stock. Either way, selling puts for income is a strategy that every investor should incorporate in their quest to grow wealth.
So why aren’t more investors selling puts for income?
Most “experts” think this kind of investment is too risky or complicated for the average investor. And frankly, there’s no money in it.
Once you learn how to use this type of investment, you begin to see the whole world of finance differently. Instead of “paying” people to invest your money, you learn to get paid to invest.
Selling Puts for Income: The Right Pick
The first key to selling puts safely and profitably is knowing the real risks in owning a company’s shares. We need to assure ourselves the companies we sell puts on are fundamentally sound.
For instance, take Southwest Airlines (NYSE: LUV).
It’s a company that we feel comfortable owning for the long haul mostly due to its unwavering quest to please shareholders. It’s also one of Warren Buffett’s top 15 holdings and one that I will be adding to the portfolio on Monday.
The stock is currently trading for $54.71, near a 10-year high.
In my opinion, the price is a little inflated. So I prefer to pay $52.
Remember when I said that we want to get paid?
Well, given our desire to own Southwest at $52 – we can get paid. Think about that: we can get PAID to agree to buy a stock at a lower price that we prefer.
I don’t want to get into the details in this short column, but we can sell one put contract that gives us the ability to buy 100 shares of Southwest at $52 a share – and collect an immediate $75, lowering our cost basis to $51.25 immediately.
And no matter what happens, we get to keep that $75. If Southwest stays above $52 at expiration, the $75 we collected is ours.
But for the sake of understanding, we should examine the alternative – Southwest closing below $52 by option expiration. In that case we’d keep the $75 and be forced to buy Southwest stock at $52 per share.
Again, we would actually own the stock for $51.25 per share – that’s the $52 strike price minus the $0.75 premium. That’s 6.3% less than Southwest’s current market price of $54.71.
Here’s that math:
Initial income from sold put premium – $75
Purchase 100 shares of Southwest at $52 – $5,200
Initial outlay: $5,125
Premium collected: 1.4% over 34 days or 14% to 15.4% annually
The important thing to remember is that if the stock trades below $52 by option expiration, you become a shareholder just like everyone else . . . but at a discount.
Plus you’d get the 0.73% dividend going forward.
To me, this safe return is superb given the current yields on bonds and other safe investments. . . and the likelihood of Southwest raising dividends going forward. Moreover, we can sell puts 10 to 11 times a year on Southwest, thereby increasing our return in premium to over 14%. One other thing to mention . . . if we are put Southwest stock, I will recommended selling a set of calls against our new stock position.
Again, I will be talking about this further in my next edition of The Strike Price.
— Andy CrowderMy #1 Stock to Buy Now [sponsor]
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Source: Wyatt Investment Research