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Want to Get Paid to Buy Shares of Your Favorite Stock?

Does it sound too good to be true? Believe it or not, it's real.

Hey there! My name is Nate and I write about trading for the WOLF Financial newsletter. If you are looking for more trading tips and tricks, I guarantee you’ll enjoy my content on 𝕏, @tradernatehere. Thanks for reading!

This service is for general informational and educational purposes only and is not intended to constitute legal, tax, accounting or investment advice. These are my opinions and observations only. I am not a financial advisor.

A cash-secured put (CSP) actually has a pretty great title.

Unlike a lot of lingo in the options world, this one is straightforward.

To sell a cash secured put you must have enough cash in your account to buy 100 shares at the strike price of the put option you are selling.

For example, if you see XOM as a candidate to buy when shares are at $110 you may consider selling a CSP for XOM at the $110 strike price.

A trade like this would require you to have $11,000 in your account.

The reason you need this cash is because after selling the put you have now obligated yourself to buy 100 shares of XOM at $110 per share if the owner of the put option exercises it.

Remember that when you own an option, you can exercise it at any time. Owners of options do not need to wait for the expiration date to execute.

As the seller, you are rewarded for setting aside the $11,000 to cover the put sold with a premium you collect when you make the sale.

And you’re happy to do so because that is the price you are willing to take ownership of 100 shares of XOM.

XOM daily candles

As of Friday’s close, you could collect $183 for every $110 strike put option expiring April 19th that you sell.

That is right! You are getting paid to buy shares at the price you want to buy them at anyway.

Another way to look at it is, you’re getting a slight discount to the $110 strike price that you are willing to pay.

After taking the cash collected from selling the put options, the effective cost of the 100 shares of XOM would be offset by just shy of 1.6%. It drops your purchase price to $108.17 per share.

This is your effective price per share, $108.17, if you get assigned.

Not bad when you were willing to pay $110.

And you can repeat this process over and over if shares trade in a range, never dropping below the strike price but also never moving too far away from it.

Stocks trading in a range present great opportunities to collect cash repeatedly by selling cash secured puts every time the stock tests the low end of the range.

PLTR might provide an opportunity.

PLTR daily candles

If you are looking to buy PLTR for your portfolio but would like to do so at a discount, the CSP strategy can be utilized here to generate some additional cash.

Selling the April 19th, $22 strike puts allows you to collect $80 per contract, as of Friday’s close.

That is over 3% gained in cash for selling CSVs for PLTR.

If you would like to buy at $22 regardless, this might be a great way to both collect cash and eventually add shares.

Risks of CSPs

One risk you may already be thinking about.

If you sell a CSP you are obligated to buy shares when those very same shares could drop much, much further than the strike price you selected.

This would be less than ideal but is also the biggest risk you face.

It is important to review charts for levels of support, understand upcoming events like reporting earnings or product announcements, and mitigate risk before any trade.

The same is true for executing with CSPs. You must be a risk manager first and a trader second.

In the first example, XOM could drop to 90 suddenly on unexpected news. You have to assess the risk associated with potential news events and their likelihood.

Would you be ok owning shares at the $110 strike price if they did drop all the way to $90?

If you had a long-term thesis you might be perfectly ok with this and could even consider adding to the position to drop your average price per share.

If you would not be comfortable with this scenario, you may want to reconsider and look for other opportunities to use the CSP strategy.

The second risk is that shares do not drop at all and instead move higher. Or even worse, they move much, much higher.

Using the PLTR example, if shares take off and never come close to dropping below current levels you will have missed out on the opportunity to buy before the run up.

You will have collected premium for selling the puts, but since you never were assigned the shares, you don’t get to participate in the upside.

That is the risk tradeoff for the reward of collecting cash by selling CSPs.

I hope this helps and provides another potential strategy worth considering for your trading toolbox.

Have a great week ahead!


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