Markets across the globe plunged yesterday.
Over the weekend, news covered the U.S. and China trade talks. It seems that the deal wasn’t as stable as we’d expected it to be.
President Trump said talks were going too slowly and threatened to ramp up tariffs.
In response, China announced it may back out of the negotiations altogether.
Before this weekend, every news item about trade talks was positive.
Even the White House was optimistic that it would make a great deal with China as soon as this week.
Traders had priced in the good news, and that’s helped the stock market rally since the start of this year.
The abrupt change in the situation caught traders off guard, and we saw that initial reaction yesterday when the stock market plunged at the opening bell.
I’m not one to panic and sell on knee-jerk moves like this. Instead, I look for an opportunity.
And on sharp sell-offs, my favorite opportunity is a strategy that benefits from the move lower — selling put options…
Sell Put Options on Intel
To learn more about my No. 1 strategy, watch my video below.
If you’ve never heard of selling put options before, forget everything you know about options.
This is a completely different approach that has had a greater than 90% win rate since 2015 in my Pure Income service.
Most investors use options for speculation — placing bets on a stock moving in a certain direction.
Buying options can have huge payoffs, but it also comes with great risk and volatility.
Selling put options is less risky than buying a stock, and it allows you to consistently collect income.
That’s why it’s my favorite strategy to use when stocks are selling off. We collect income, and our worst-case scenario is to own stocks at an even cheaper price than their current trading price. You can’t lose!
Have you ever wanted to pay less for something than the actual price? How about getting paid to agree to buy it at that lower price? That’s what selling put options can do for you.
We’ll walk through a real trading example that, if your broker allows it, will let you sell a put option on Intel Corp. (Nasdaq: INTC) to collect automatic income today.
When we sell a put option, we are agreeing to buy 100 shares of the stock for every contract we sell at a certain price.
That price is known as the strike price. There’s something for you to keep in mind — you can’t buy those shares unless the stock is trading below the price. That’s why my No. 1 rule when selling put options is to sell them on stocks you want to own.
Then, if the worst-case scenario plays out and you have to own the stock, you are buying it at a substantial discount from where it was trading, and you got paid during the process. See, it’s a win-win situation.
And after market sell-offs like we saw yesterday, investors are giving you more money to make this simple obligation.
Here’s how it works…
Selling Put Options — Explained
For Intel, we are going to agree to buy the stock at $45. That’s about 10% lower than where it was trading yesterday.
In doing so, we get paid a premium.
This premium is what the market will pay you to possibly buy shares of a stock. It’s what I focus on in Pure Income to generate consistent income. But you can also look at it as an addition to getting to buy shares at a discount.
See, many investors will have a specific price at which they’d love to buy more shares. But until it hits their price, they just sit back and wait patiently.
Selling put options allows you to get paid to take the same approach.
With Intel, your premium is $1.30 per share, or $130 per contract, based on prices from yesterday. These will be different today, but should still be over $1 per share. This money is yours to keep. Regardless of whether you end up buying the stock, you keep your income.
The last thing we have to select is how long we want to keep the order open. When you agree to buy shares of the stock, you determine how long the contract lasts.
It can be a few weeks or a few months. The longer you keep it open, the more income you collect — but then you put yourself at risk of market crashes. By focusing on just a few months, you can have a better idea of the trends and expectations. The further out, the more uncertain those views become.
For the trade today, we’ll use September 20, 2019, as our option expiration month.
To summarize, when you sell this put option, you are agreeing to buy 100 shares of Intel at $45 a share at any point from now until September 20. And in doing so, you collect $1.30 per share.
To place this trade with your broker, find the Intel September 20, 2019 $45 put option (INTC190920P00045000), and select “sell to open” to enter the position. Feel free to use a market order, or a limit order for $1.
The worst case for this trade is that Intel shares head lower and we end up buying the stock. Intel is a company I like, though, and I think it is trading at a great valuation at current levels. So I’m happy to own shares at $45, and get paid to do so.
If the stock stays above $45, you keep the income you collected, and the trade goes away after September 20. If we buy the stock, you keep the income, and now you own shares of the stock too.
A win-win scenario — that’s the ideal strategy to implement after sharp sell-offs like the one on Monday.
Chad Shoop, CMT
Editor, Automatic Profits Alert