How Selling Puts Creates A Cheaper Entry Price

During their recent episode of the Value Options Letter and Acquirers Podcast, Travis and Tobias discussed How Selling Puts Creates A Cheaper Entry Price. Here’s an excerpt from the episode:

[Tim] Right. So the way to think about it is when we’re selling puts and we’re actually exercised, what we’re doing essentially is manufacturing a cheaper entry price into the stock. And you’ll see in one of the examples that we’re going to give towards the end of this presentation today, you’ll see how powerful that is because often you’ll miss the biggest part of the downturn in the stock.

And so we’ll get into that. So let’s keep going. But good question there.

So I got into this. I’ll just be quick. How a cash secured put works.

If we sell a put on a stock and the stock stays above our strike price at expiration, the put expires worthless and we keep 100 percent of the premium, then we can do that again. Repeat the process. Right.

Outcome two, we’re assigned the stock dips below our strike. We end up owning 100 shares per contract at that strike at a price we already decided we like the stock at. And then the premium lowers our costs further.