Papale on Big Bird and Put Selling

Endangered?

Last night was the first of the presidential debates.  Obama was the guy with blue tie and Romney had on the red one.  Plenty of pundits out there breaking it all down.  But since I know our readers are busy I am going to provide a condensed summary of what we can take away from last night.  Here it is:  Mitt likes Big Bird.  That’s Big Bird from Sesame Street –  not the big bird that you might get from the guy who you cut in front of in traffic.  Now this morning Big Bird might be feeling a bit uneasy as he might not survive if Mitt wins, as PBS might lose some federal dollars under his plan.  So let’s call him potentially endangered.  Wonder  how Bert and Ernie are taking all this?

In my opinion one of the great investment strategies that does not get used nearly enough is put selling to build a portfolio of stock or ETFs.  Most advisors and brokers steer clear of it because options in general are not used much by portfolio managers.  But here at DiscoverOptions we have a section on put selling and most students that go through that module have a good understanding how this strategy can work both in their trading and investing.  As brief review, the put seller has the obligation to purchase the stock at the strike price if the put buyer exercises his right to sell at that price.  As compensation for taking on this obligation, the put seller collects a premium.  For example, say you like AAPL but only want to pay $625.  You could sell the November 625 puts for around $13.50 as I am writing this with the stock around $671.  If AAPL falls below $625 at November expiration you will have the obligation to buy the stock at that price.  But that is not your net purchase price.  Remember you get to keep the $13.50 you sold the put for so your net purchase price is $625-$13.50 =  $611.50.  What if AAPL closes above $625?  The holder of the put will not exercise and the put expires worthless and we keep the $13.50 for a 44 day yield of around 2%.  If you’re an investor spend some time looking into this strategy or contact us for further help.  Your portfolio will thank you.

Steve Papale is a mentor with DiscoverOptions, the educational arm of OptionVue Systems.  Inquiries should call 847-816-6610 or email info@DiscoverOptions.com.

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