“I was warned by my broker of the risks.”
“I couldn’t find a broker who would let me do it.”
“Apparently, I don’t have the ability to perform the strategy.”
These are just a few of the responses I got back from individual investors who try to implement the only win-win strategy in the stock market.
Their broker is warning them about the risks of a strategy that has less risk than buying a stock.
Sometimes, it’s even hard to find a broker who will allow you to do it at all.
And when you do find a broker and get past the warning signs, you still may not have the right access in your account.
This sounds like a daunting task just to have access to some obscure stock market strategy.
But it’s one that is worth the work. Because this is not a little-known strategy amongst hedge funds, wealthy investors and Wall Street. It’s just kept under a tight lock and key from individual investors like you and me.
And today, I’ll share all the details with you.
The Market Pays You to Buy Stocks
The unique strategy that your broker makes a process of trying to unlock is selling put options.
Your broker requires you to fill out forms and have extra capital, and they still tell you it is a high-risk strategy even though they know it’s safer than buying stocks.
But when you are buying stocks, or even buying options, there’s minimal paperwork needed and few warnings.
The reason they don’t tell you about the ability to sell put options is because of the nature of the transaction.
Let’s compare it to buying an option.
When you buy an option, you are paying those funds to the market makers, or another seller, in exchange for a bet on the direction of a stock. Basically, if the stock doesn’t rise or fall as you expected, the money you paid is gone. Completely wiped out.
When you sell a put option, you are getting paid by market makers, or another buyer on the market. They are giving you money. Money that is yours to keep.
All you do is make one simple obligation: to possibly buy shares of the stock if it falls to the price you pick.
The market pays you to buy stocks.
Not many people know about this.
You may think you have to put a stock on your watch list and check it every day to see if you get an opportunity to buy it at a better level.
But selling put options allows you to take the same view on a stock, looking for a pullback before you jump in, and get paid for it.
My Simple Method Is a Win-Win Strategy
I have a simple “Triple Check” method to make sure you make an excellent trade every time.
There are just three checkboxes for you to mark off before you sell a put option for income.
The first may be a little obvious, but since the biggest risk is owning shares of the stock, you can only sell put options on a stock that you want to own today. I call it the “Own-It Rule.”
Then, if the stock falls and you end up owning it anyways, at least you get paid in doing so, and you bought it at a cheaper price than it was at when you placed the trade.
The second rule is a two-parter. I call it the “3% Rule.”
This rule is my favorite because it tells us how much money we are set to collect. The minimum amount I want to get paid for possibly buying shares of a stock is 3%.
But this applies to mostly blue-chip stocks. The smaller the stock, the greater the premium you’d look to collect. For example, a small-cap stock can generate 10% by selling a put option against it.
The second part helps us figure out which price we want to own the stock at.
Now, you may already have a price in mind, but if you don’t, I want it to be at least 3% below where the stock is currently trading. Again, the more volatile a stock is, the lower the price you would want to own it at should be.
And lastly, my “90-Day Rule.”
You have to pick a period of time that you want to keep this obligation open.
I prefer about 90 days, or three months. It’s the sweet spot for picking up the largest amount of income while taking minimal market risks.
You can go out just a few weeks, but your income over that time period will be minimal.
You can go out a year or two to collect more income, but then you put yourself at risk of wild market swings over that time.
Three months is the sweet spot all things considered.
And that’s it.
That’s my Triple Check system to make sure every put option you sell is the absolute best trade you can make.
Chad Shoop, CMT
Editor, Automatic Profits Alert