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Earn Cash While You Wait For A Better Share Price

12 August 2009 5 Comments

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.

The Strategy

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:

  1. If GDX hits $32, I’ll own the shares at a purchase price that I’m very comfortable with.
  2. 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.
  3. 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.

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