You see, this is a particularly attractive strategy, when volatility is low on the options that you want to purchase for insurance. But it’s not a particularly attractive strategy, if we wanted to sell these options to create income, and purchase the stock at a particularly attractive price, like we did with CitiBank.
We’ll go back to CitiBank for a second. Those July options are 79% implied volatility, which is relatively high. The options are priced accordingly. They are more expensive. Now, if we wanted to go ahead and purchase these options as insurance policies against stock that we’re buying, we’re paying a fairly decent premium for this insurance, because the implied volatility is so high.
If this volatility was down to 34%, like they are with Starbucks, the 17.50 being almost $2 out of the money on this stock, is only going to be worth about 20 cents. That’s why it’s very attractive to sell this option against a longer-term dated option, or even against an option that’s in the same month, in order to collect those premiums.
I hope you see how explosive this particular strategy is. You get paid to wait while the stock drops to the price you would like to buy it. Using a long-dated option at a lower volatility helps you collect premium, month after month, until you get the date of your long-dated put that you purchased.
You get paid to wait, and you get the stock at the price you want, with built-in protection that you don’t have to pay for again. Hopefully, you’ll have collected enough premium, over July, August, September, and October, if you purchased the December options, that that put not only didn’t cost you anything, but actually made you some money as well.
I hope you find this a particularly attractive strategy. Just remember that if you do sell a put, the potential for being assigned that stock is very real. You can get assigned that stock at any time. You have to have an account in which you have enough capital, on margin or in cash, to be able to purchase the shares of the stock that you want. If you sold 10 of these options, you have to be prepared to buy 1000 shares of that stock.
If you sold 5 of these options, you would have to have enough capital in order to purchase 500 shares of that stock. This is a very attractive strategy. If you want to use it, especially on the longer-dated options, you’ll find it very attractive.
It can build your wealth, while you’re waiting to get stock at the price you want to buy it at.
That’s it for this strategy. Stay tuned, guys. I have another strategy for you to discuss. That’s explosive strategy number three. Trade with confidence.