Why Selling Put Options Should Be Your No. 1 Strategy in 2019
Now that we all have our New Year’s predictions behind us, it’s time to start talking strategy.
Many will go all-in on their New Year’s predictions.
My prediction stands — 2019 will see a strong stock market rally.
Emotionally, however, it is a tough time to buy the dip.
So, I want to share an investing strategy for what looks like an uncertain year.
The Dow Jones Industrial Average closed 2018 with a 20% drop.
And in the opening minutes of 2019, the Dow continued the carnage by falling nearly 400 points.
The market has bounced back since then.
The uncertainty of the market makes my investing strategy for 2019 thrive — whether the stock market follows my original prediction or not.
Earn Income on Your Favorite Stocks
My No. 1 strategy for 2019 is selling put options.
It’s a favorite strategy of mine year in and year out.
But in 2019, it’s my favorite one for a different reason.
In my premium Pure Income service, we sell put options to generate a steady stream of income.
Our sole purpose is to generate yields from the premiums we collect, by selling put options.
As we head into 2019, my strategy allows you to buy stocks on a dip, rather than at the top.
When you sell a put option, there are four main choices to make:
- Which stock do you want to own? (You’ll sell a put option on this stock.)
- What strike price — the price at which you may own the stock — do you want to use?
- How long will you keep the obligation to buy the stock open?
- How much income do you want to collect?
As long as you answer these questions before each trade, selling put options is a win-win opportunity.
I have a simple Triple-Check Method to ensure I’ll collect double-digit annualized returns — several times a month.
If your focus is to own the stocks, you can adjust it as needed.
Let’s Look at This Example
Let’s say The Coca-Cola Company (NYSE: KO) is the stock you like.
You know investing legend Warren Buffett is a fan. You are tempted to buy it today.
Shares of Coca-Cola plummeted about 7% from its peak late last year.
Coca-Cola is a blue-chip stock that doesn’t see shifts like this outside of a stock market correction.
In the last two weeks, shares have rallied almost 5%.
It’s an interesting opportunity to jump into the rally at this point. Keep in mind that there is a chance shares will fall to around $46 a share.
But instead of buying shares at the market price, you can sell a put option at $45 a share.
That’s roughly a 3% discount from the stock’s current price.
Now that you have the stock you want at the price you want to pay, you start looking at option expirations and the income they provide.
Here are four available expiration dates:
- January 25 (weekly), 0.5% in income.
- February 1 (weekly), 0.7% in income.
- February 15, 1.3% in income.
- And March 15, 2% in income.
As you can tell, the longer you wait with the expiration, the more income you collect.
Depending on your expectations, taking the February 1 option expiration — just over two weeks away — nets you a 0.7% yield.
That’s an annualized return of 18.2%.
If shares of Coca-Cola stay above $45 and you don’t get a chance to own the stock by February 1, you can repeat this process over and over.
You’ll collect income along the way and wait to own shares.
Your worst-case scenario is that shares of Coca-Cola fall below $45. If that happens, you’ll end up owning the stock at $45 a share.
The important part is that your income — set at 0.7%, or $0.35 per share — is yours to keep.
However, your paper losses get steeper the more the price falls below $45.
So it’s crucial to focus on stocks you want to own at today’s prices.
If you get paid to buy the stock at a discount on today’s price, and the stock falls further than that, you’re still happy owning the stock.
And you are in an ideal position to benefit from a rebound.
Chad Shoop, CMT
Editor, Automatic Profits Alert