Earn Cash While You Wait For A Better Share Price
Yesterday, I made my first move in the world of options. I decided to sell a put on a stock that I want to own, but only at a lower price. I sold the the December 2009 put on GDX with a $32 strike price. The premiums that I collected from selling the put were $1.35 for each share. I bought 2 contracts (each equate to 100 shares), so I collected $270 in premiums. In return, I’m obligated to purchase 200 shares of GDX should the shares be “put” to me, most likely if the share price hits $32.
First and foremost, I’m willing to own the shares at a purchase price of $32 per share. If not, then you’re assuming a higher level of risk with a move like this. I want to own GDX, just not at current levels.
Second, I collect cash for selling the puts. If I have to purchase 200 shares at $32 per share, that is $6400 total. Since I already received $270 in premiums for the transaction, my actual purchase price per share is $30.65 if you factor in the cash received. I’m definitely willing to own GDX for $30.65 per share.
The result will either be one of the following three scenarios:
- If GDX hits $32, I’ll own the shares at a purchase price that I’m very comfortable with.
- If GDX goes way below my break even point, which as I stated is $30.65 per share, then I am forced to purchase the shares at a higher price than they would be trading at during that time, which would result in a loss. I’m still comfortable with owning the shares at this entry point, however.
- If GDX stays above $32 (currently at approx $39) or goes even higher, my options expire and I keep the $270 from the premium collected.
I like this move very much since I’m able to collect some cash while I wait for a stock (actually an ETF) to go lower to a price that I’m comfortable with purchasing it.
A few notes… many brokers will require you to have the cash available to purchase these shares, and I would definitely recommend this. Remember, only do this if you really want to own the shares.