by Ruth
Stocks: Buy Low, Sell High.
Previously I talked about why the third servant in Jesus’ parable who buried his entrusted treasure was reprimanded. I also shared that everything, including my life, is entrusted to me temporarily. My responsibility is to obey the Lord and make good use of the talent assigned to me according to God’s guidance.
What is the key element embedded in this belief? Learn. Work hard.
If I try to invest in stocks but don’t want to do research, it’s gambling. Think about the fact: Professional investors have the tools, spend hours analyzing the market, and still can’t make money all the time. As an amateur, how can I expect to win?
We all wish we can buy a stock at its lowest point and then sell it at its highest point.
But how?
Unfortunately, no one can provide a winning formula. However, methods exist for us to study a specific company to pin down a price range to get in and another (higher) price range to get out. I’m a lifetime member (one of my best investments) of the National Association of Investors Corp. (NAIC) and have benefited from their stock selection guide.
Interested in learning more about how to estimate future growth rates and predict a stock’s potential return? You may want to check out the NAIC’s website at www.betterinvesting.org.
Sell Put Options to Buy Stocks.
You have done your research and identify a few stocks you like. The only problem? According to your analysis, the stock’s price is currently not in the buy range.
Many of you already know that you can use a limit order to buy or sell a stock at a specific price. For example, if you want to spend $90 per share to purchase shares of a $100 stock, you can set a limit order that won’t be filled unless your specified price becomes available.
There is another way to do it. You can sell a put option.
What is a put option? It’s a contract that gives the option buyer the right to sell a particular stock to you (the option seller) at a predetermined price known as the strike price, within a specified window of time. To induce you to sign the contract, the buyer will pay you an option fee, the premium, right now (i.e., the moment you sell the put).
The following is a real case study from my records.
For some time, I wanted to own a certain stock, but its price was always outside the buy range of my analysis. When the stock’s price was $33, I sold five put options at a strike price of $31, with a target time of one month (i.e., the contract would expire after a month). For your information, one option is 100 shares. In another word, I entered a contract with the option buyer that he/she could force me to buy the stock at $31 one month later if the stock price fell below $31. The premium wasn’t much, only $0.8/share. So, I pocketed $400 from the five puts ($0.8*500 shares = $400).
One month later, its stock price was $34. The option expired, and I didn’t get to buy the stock. I still desired the stock and sold another five put options at a strike price of $33, with a target time of two months. Because this time the contract was for two months, the premium was higher at $1.6/share. I pocketed $800 ($1.6*500 shares = $800). When the option expired, I still didn’t get to own the stock and sold another four rounds of put options.
The market crashed in March 2020 because of COVID-19, and that stock’s price fell to $23. I was forced to buy 500 shares at $31. However, because I’d sold six rounds of puts with a cumulated premium of $8.5 per share, my actual cost to buy the stock was $22.5 ($31 minus $8.5) per share. A few months following the March 2020 market crash, the price of this stock returned to $34. By the way, this stock pays a good dividend (~$1.8 per share at ~4%), much better than the bank.
To sum up, if you have done your research and really want to own a certain stock, but its price is outside your buy range, then sell puts. If its price doesn’t fall, you get to keep the premium money. If the whole market crashes because of certain disasters (e.g., COVID-19), and you’re forced to purchase the stock, you’ll likely own it at a discounted price.
Come back for Part II next week. I’ll talk more about options and tips about execution.
