Every market has hidden discounts throughout the year that are not “bargains”. These “bargains” are only achievable with the proper options trading strategies. Let me show you:
Let’s say you want to grow your portfolio by adding Dell stocks to it because you have a feeling that a move up is coming.
Instead of going to the market and buy the stocks you decided to play the smart ass card and see the range of positions of puts for individual values.
For the year-end expiration (4 months let’s say) these are the various strikes. Call is quoting at the moment at US $11.58 dollars. If we were selling Dell put on strike at US $ 11.50, we are by contract in the obligation to sell our shares at that price. So, we will have to go to the market before the expiration date and buy the shares, which is what we wanted in the first place. The number of stocks we want is 2000 which represents an investment in the spot market of US $23160 dollars. If we choose the strike above,we will get paid the amount of US$ 0.53*2000 = 1120 dollars; which represents 4.8% of the original investment.
If when maturity, the price is higher than $11.50 there is no obligation from us to buy the shares as the option buyer will not execute; and we benefit from near 5% (the premium). In this last case we could start again the operation of “buying with discount” with a new sold put until we buy the stocks that we intent to. If the shares were quoting at maturity below the established $11.50 strike (forcing us to sell) we will have to buy the stock, which was our desire in the first place, but we pocketed a bonus of 4.8% which is our “rebate”.
To elaborate… What would happen if you actually quoted at $10.50 ?
Since we had been forced to sell Dell stock to $11.50 (strike), obviously we must buy as the buyer of the put (in a position contrary to ours) will exercise his right on a fairly implied value option. So we bought 2000 shares of which will call the buyer of the option. Our result will be $10.50 – $11.50 * 2000 = – $2000 dollars; Payment of the premium of $1120. Total lost of US $880 equivalent to % 3.88. Meanwhile, the price of Dell shares fallen by 9.33% (from $11.58 to $10.50), which we have benefited from an almost 5%.
A smart move would be to buy the put option that we had sold the day of maturity, to close the position. Our loss would be approximately the same as in the previous case and we could buy the shares or start a new sale of puts. This will be repeated in any asset of the portfolio we want to build.
