How To Buy Stocks at a Discount
or Get Paid For Trying

Once you learn how to buy stocks at a discount, you'll be able to buy your favorite stocks closer to the price that YOU want to pay for the stock, not what the market says you should pay.

A stock trading strategy that will enable you to buy stocks at a discount involves stock options and more specifically, selling PUTS.

Before some of you get turned off because you have been trained to think that Options are very risky and dangerous, at least read the rest of this article and then decide.

This stock trading strategy on how to buy stocks at a discount works well, and should be used, with stocks that you would be comfortable owning at the price determined by your cost, should you be required to purchase the shares upon expiration. In other words, be sure to select high quality stocks that you wouldn't mind owning long term if necessary.

Let's first take a look at what you are getting into when you sell a PUT option:

  • When you sell a PUT option you will receive a premium as income, that is yours to keep, immediately.
  • By selling a PUT option, you are obligating yourself to purchase shares of the underlying stock at a pre-determined price (which is determined by the Strike price you select) if the stock price is below the strike price upon expiration (and sometimes before).

Let's take a look at an example scenario to help illustrate the process:

  • Let's use Microsoft's stock MSFT, for our example. MSFT closed at $27.02 this past Friday December 3, 2010, and you would like to purchase shares of MSFT but you think they may move lower in the near term.

    Instead of waiting for prices to move lower, and possibly missing out with shares not moving lower at all, you can sell a PUT option to effectively buy the stock at a discount should prices move lower as you are expecting, or get paid for trying.
  • Looking at the option prices for MSFT you see that the February, 2011 $26.00 PUTS can be sold for $0.85. You decide that you would feel comfortable with (and have enough cash in your account for) owning $13,000 worth of MSFT stock.

    Using the $26.00 strike price, if you were required to purchase the shares upon options expiration, you could buy 500 shares ($13,000 divided by the $26.00 strike price).

    1 options contract equals 100 shares, so you could sell 5 PUTs in this example (5 x 100 shares= the 500 shares that you can afford to purchase if needed).
  • By selling 5 PUTs at the price of $0.85, you would receive $425.00 in premium directly into your account ($0.85 x 100 shares per options contract x 5 contracts). This money is yours regardless of the outcome, and this is how you would get paid for trying to buy the shares of stock at a discount.
  • Should price of MSFT be below $26.00 at February, 2011 options expiration, you would automatically buy 500 shares of MSFT at $26.00 per share, even if the price was at $20.00.
  • Your cost for your shares of MSFT would now be $25.15 (the $26.00 per share you paid minus the $0.85 in premium you previously received). You have effectively learned how to buy stocks at a discount (in this case a 6.9% discount from the original trading price of $27.02), instead of paying the initial price shares were trading at of $27.02 on December 3, 2010. Not bad.

Let's Review the Possible Outcomes

  • At options expiration, the price of MSFT is at or above $26.00 per share = You keep the $425 in premium you recieved and your PUTs expire. You do not have to purchase shares of MSFT.
  • At options expiration, the price of MSFT is below $26.00 per share = Since you were obligated to purchase shares if the price was below $26.00 at options expiration, you would automatically be sold 500 shares of MSFT at $26.00. Your cost would be $26.00 minus the premium you recieved of $0.85, or $25.15 in this case (in this case a 6.9% discount from the original trading price of $27.02).
  • As options expiration gets closer, if the price of MSFT is declining, you can choose to buy back your PUTs that you initially sold and then decide whether or not to sell additional PUTs from a further out month or not.

Before testing the waters with this trading strategy on how to buy stocks at a discount by selling PUTs, carefully review the potential outcomes. If you followed the first guideline and selected a stock that you would feel comfortable owning at your pre-determined price, you should be in a good position.

The third potential outcome mentioned above is part of learning how to manage a position. Read more about managing a short put position in my follow up article here:

For details, examples and information on how to buy stocks at a discount and lower your costs even further using the above and additional option strategies, check out the 130+ page ebook offered here: Leveraged Investing Guide or read further details on my page here: Long Term Investing, at a Discount.




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