The Put Options Strategy: Yield You Can Live With

I’m sure you’ve heard the slogan: “It’s so easy a caveman can do it.”

Geico, the insurance company, made this tagline famous with its commercials that seemed to play every few minutes. Granted, switching insurance has been an increasingly easy task to do; citing that a caveman could do it is a bit of a stretch.

Either way, if Geico believes switching insurance is so easy, I am convinced that this simple options strategy to collect thousands in extra income is just as easy.

Selling put options allows you to generate yields around 20% in just three months from blue-chip stocks. Even though it sounds like an investment strategy that is too good to be true, rest assured it is very attainable.

In a put sell, you sell a put option and pocket a premium. If the shares of the underlying stock fall below the put’s strike price, you are obligated to purchase 100 shares of the stock for each contract sold at the strike price, but you still keep that premium.

That’s the worst outcome, but I turn it into a no-loss gain by selling put options on stocks I would be perfectly happy to own. But most of the time, the stocks I choose never reach the strike price, so I just collect the premium, wait three months, then do it again.

Generating 20% from stable stocks that you already want to own happens month-after-month in Pure Income. Just last month our put sell using Internet networking giant Cisco Systems (NASDAQ: CSCO) snagged a 19.3% gain for Pure Income subscribers.

The strategy may not be so easy a caveman can do it, but I am positive it is so easy you and I — and anyone else looking for income — can do it.

Let me walk you through just how easy it is.

Rising Volatility Creates Opportunity

Cisco Systems is a relatively stable company that doesn’t make sharp moves in either direction too often. That is the exact type of company I look for when the markets start to turn south like they did at the beginning of August.

A host of factors created volatility and sent the broader markets lower this fall. We had geopolitical concerns rising between Russia and Ukraine — as well as tension increasing between Russia and much of Europe, a couple of weak earnings reports and news that the U.S. economy was improving (which means interest rates will likely rise sooner than later).

The market sell-off caused the S&P 500 Volatility Index (VIX) to spike 30% in just two days from less than 13 to north of 17.

This increase in volatility makes selling options very attractive because it helps to pump up the premium the seller will receive. The more volatility — or the higher chance that the stock is going to make significant moves before expiration — the higher the premium.  While that’s bad for the option buyer, you, the option seller, benefit from the extra income earned.

In short, option prices are comprised of three components: time, intrinsic value and volatility. I screen thousands of stocks each week to determine the best opportunity, but I have a select few that I constantly look at and want to own — Cisco is one of them.

So when I see the company’s share price drop more than 4% in a short span due to no fault of its own, I am looking for an opportunity. Since shares were at bargain prices to me, I took advantage of the increased volatility to agree to buy the shares 4.5% below where they were trading at that day by selling a put below the stock’s current price.

In doing so, we collected $0.93, or $93 for each contract sold because each contract represents 100 shares. The combination of the premium received and the price difference between the strike price and the current price gave us a 7% safety net. In other words, the shares of Cisco had room to fall an additional 7% before we suffered a loss on the position.

Of course, if the stock’s price rose, as it did, we end up not owning the stock but still get to keep the income.

Don’t forget that a put sell can be initiated on margin or in a cash-secured account. It doesn’t matter which strategy you use — the risk/reward is still a win/win for you.

For this Cisco trade, the shares rose 7% over the time frame, the same as the S&P 500, leaving us with a 3.8% gain in a cash account and a 19.3% gain in a margin account in just three months.

Selling Put Options in 15 Minutes or Less

Similar to Geico, implementing this stable, yield-generating strategy can be done in just 15 minutes a week, allowing you time to read through my Pure Income dispatch, log into your brokerage account and place the trade. That’s how easy it is to achieve thousands in extra income.

In each alert you will learn why we are making the trade, how to make the trade and what amount of income you should expect to collect.

I don’t know if a caveman could actually sell a put option, or if he could even read this article, but I am confident it’s so easy you could do it in just a few minutes.

Regards,

Chad Shoop
Editor, Pure Income

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