Step 1: Selling PUTS

While this is labeled as the first step, you can skip this step entirely by purchasing 100 shares of a security and moving to the next step of selling a covered call. But, this is a strategy that enables us to purchase shares at a reduced price and collect premiums while we wait.

• When we sell a PUT we collect a premium for the right to purchase shares at predetermined lower price

  • • e.g. Share price is $50, we sell a 40 Strike Price PUT

    • If the price falls to $40 or lower by expiration, we purchase the shares at $40/share and we also keep the premium

    • Note how it said by expiration. The price may drop below, but it could also rise above the strike price before expiration.

    • Selling a PUT can be exercised by buyers at any time, but only about 20% of options are exercised and most will wait until expiration or sell their position which does not impact what you do.

• Selling a PUT allows us to purchase shares at a reduced price due to the drop in price and the collected premiums

  • • Say we collected $100 premium for holding the $40 strike contract for a month; shares are trading at $45

    • The contract is exercised and you purchase the shares at $40

    • Cost basis is $40 x 100 shares - $100 (collected premium) = $3,900 instead of $4,500 if you purchased the shares instead of selling a put

    • You can decide to close the position and keep your $100 or you can move to Step 2 and buy a covered call

• Should the price stay above $40, the contract expires worthless, we keep the $100 premium, and we open a new PUT to start all over

• When we Sell a PUT we collect a Premium

• Selling a PUT contract gives us the right to buy their 100 shares if it hits below the strike price selected; this can be executed at any time by the buyer

• In order to Sell a PUT we must have one of the following conditions:

  • • Cash secured PUT - since we do not own any shares we must secure the PUT with cash should the option be exercised

    • If our strike is $10, then we would need $1000 to secure the PUT ($10 x 100 shares)

• Benefits of Selling PUTS

  • • Collect a Premium

    • Purchase stock at a lower Strike (Price Point) if price drops below your Strike; hopefully premium offsets your purchase price and current price

    • Theta (time) decay - we have time on our side and option premiums decrease each day (aka we make money)

    • We can target high volatility times to collect greater premiums and profit when volatility decreases (see Volatility)

Thought 1: Yes, we like to get paid to do things

• Yes, get paid to purchase 100 shares at a cheaper price

• If it does not fall below your price, you can enter another cash secure PUT to earn premiums without owning any shares

• Use the 2% Rule to collect premiums worth your while (Total Cost of CSP x 2%)

Thought 2: Never be in a Rush to Own or Sell Calls in general

• In general, I have never worried about buying shares at a lower price, there are always opportunities after a bullish run, but I have definitely worried when price dropped more than I anticipated.

• Word of advice, do not be in a rush to acquire shares to enter into your position. I collected over $400 from CSP on AAPL before one expired ITM and I purchased those shares; the price then continued down $20/share more where I profited on covered calls.

• Word to the wise, find your resistance points and see what the technical analysis of AAPL is telling you.

Thought 3: Use Moving Averages, Support and Resistance, or Reversal Strategies to open positions

• If your goal is to own shares, select a strike near a support in hopes that after you acquire the shares that price will bounce

• If your goal is to collect premiums, use moving average crossovers in an uptrend to collect premiums as price rises

Thought 3: Select Deltas Using

Support and Resistance

• Find areas of support and resistance to select a strike that works for our strategy

Uptrend

• • If you are catching the stock in a MA crossover uptrend, you can be more aggressive and select a 40 delta

  • In some cases, I have selected an ITM option (50-60 delta) because I was very bullish on the stock; I do not recommend doing this on a regular basis as you may get caught in a whipsaw and have to roll your calls

  • In most cases we want to let them expire worthless, but I am quick to cut my position early if MA crosses over into a downtrend if it gets close to expiration (see When to Close/Roll)

  • Adjusting your timeframe can allow for you to collect more premiums while price continually rises. This can be very effective, with very little management, but it will come at the expense of your premium (more money can be made week to week)

Downtrend

• • This is where we need to be careful as we do not want to catch a falling knife that could cut far deeper than the strike and premium we collect

  • If you do not want to own the shares because you think the price will fall even more, do nothing or use a lower delta that is far OTM. We do not always need to be buying and selling calls just because we can.

  • Select around a 15 delta to assure you do not get assigned; this will reduce the odds of assignment and your premium significantly.

  • Adjusting your timeframe also allows you to collect more premium at a farther OTM

  • Some recommend selecting a DTE 4-6 weeks out (35-45 days out)

Thought 4: Reduce your Cost Basis

• Collecting premiums and dividends allows us to reduce our cost basis

• Over time we can reduce our overall exposure to our position

Thought 5: Dollar Cost Average into Shares

• Do something with the premiums you collect (expired contracts and not contracts opened since you may have to roll or sell your position early)

• This offers a wonderful opportunity to buy into more shares of stock you like or the one you are holding a CSP against

Three ways to DCA

• • Purchase when you make the money that way you do not forget

  • Purchase shares on the same day each month; this is similar to investing in your ROTH

  • Wait for a pullback in the price of the stock and purchasing to truly get the bigger bang for your buck

Thought 6: I do not want to own the shares

• You like the stock, but think it will trend down more

• Use weekly calls to target specific strikes that keep it OTM

• Recommend using a 15 or 30 delta; 15 delta may not seem like much, but if it falls in line with the 2% Rule then what's the issue?