Putting it together: Selling Calls and Selling Puts
In Part 1 of this series we talked about selling Puts on stocks that you would like to own. Go back and read that if you haven't already.
In part 2 of this series we talked about selling covered Calls on stocks that you already own. Go back and read that if you haven't already.
We're about to start getting a little more involved and you need to be comfortable with those strategies before you begin doing "fancier" stuff.
Ok, here we go.
There are times when you might want to both sell and Put and a Call on a stock. In exchange, you are going to take in premium payments upfront - you are going to receive cash right away.
This strategy is best when you like owning the stock but it is either:
Volatile - where the price normally moves up and down a lot, or
"Dead Money"- where the price doesn't move much at all.
In my mind, there are other strategies that are better when you can identify a clear price trend. Perhaps we'll talk about those another time.
This is a strategy for when there is not a clear trend, either because the price is bouncing up and down a lot or because it is not moving up or down much at all.
By selling the Put, you are agreeing to buy shares at a set price, if the price falls that low or lower. This is a good thing if you already know that you like the company and you know that you'd like to get shares of the company when they go "on sale" (during a price decline).
By selling the covered Call, you are agreeing to sell the shares that you have if the price rises that high or higher. This is a great thing, if you are confident about how much the shares are worth, and you think you know that the price will come back down before long, or if you are simply ready to sell the shares and be done with that company for a while, but you want to sell only if/when the price rises.
For each of these contracts, both the Put and the Call, you will receive cash in exchange for selling someone else in the market those contracts. This "premium" can really be a nice way to increase your position in a company because you are effectively decreasing your purchase price by the amount of premium you take in, if you are put the shares.
For example.
You could have made even more money, by taking in upfront premiums to do the same thing. If you have sold Puts on FSLR at a $40 strike price ($40 per share) and also sold Calls on FSLR at a $60 strike you would have been paid a lot of money in premiums that would have usually expired worthless, but when they didn't, you would be buying stock at the bottom of a defined trading range and selling at the top of the range. And you would have been paid to do it several times over and over again.
In part 2 of this series we talked about selling covered Calls on stocks that you already own. Go back and read that if you haven't already.
We're about to start getting a little more involved and you need to be comfortable with those strategies before you begin doing "fancier" stuff.
Ok, here we go.
There are times when you might want to both sell and Put and a Call on a stock. In exchange, you are going to take in premium payments upfront - you are going to receive cash right away.
This strategy is best when you like owning the stock but it is either:
Volatile - where the price normally moves up and down a lot, or
"Dead Money"- where the price doesn't move much at all.
In my mind, there are other strategies that are better when you can identify a clear price trend. Perhaps we'll talk about those another time.
This is a strategy for when there is not a clear trend, either because the price is bouncing up and down a lot or because it is not moving up or down much at all.
By selling the Put, you are agreeing to buy shares at a set price, if the price falls that low or lower. This is a good thing if you already know that you like the company and you know that you'd like to get shares of the company when they go "on sale" (during a price decline).
By selling the covered Call, you are agreeing to sell the shares that you have if the price rises that high or higher. This is a great thing, if you are confident about how much the shares are worth, and you think you know that the price will come back down before long, or if you are simply ready to sell the shares and be done with that company for a while, but you want to sell only if/when the price rises.
For each of these contracts, both the Put and the Call, you will receive cash in exchange for selling someone else in the market those contracts. This "premium" can really be a nice way to increase your position in a company because you are effectively decreasing your purchase price by the amount of premium you take in, if you are put the shares.
For example.
First Solar. FSLR.
I'm not suggesting that anyone take a particular position on this stock. I don't have a position in this particular stock. I'm just using this as an example.
As you can see, while FSLR has periods where the price trends up and down, it has done both in the last several years within a fairly defined range. If you bought when the price was at or below $40 per share, you did well. If you sold when the price was at or above $60 per share, you did well.
You could have made even more money, by taking in upfront premiums to do the same thing. If you have sold Puts on FSLR at a $40 strike price ($40 per share) and also sold Calls on FSLR at a $60 strike you would have been paid a lot of money in premiums that would have usually expired worthless, but when they didn't, you would be buying stock at the bottom of a defined trading range and selling at the top of the range. And you would have been paid to do it several times over and over again.
This is the power of this two-legged strategy. It allows you to get paid to wait to buy shares when they go on sale and also to get paid to wait to sell those same shares when they are in demand and the price is high.
"Buy Low, Sell High" is the old saying.
And here we've told you how to get paid to do it.
But, as I've said before, keep in mind, this article is just for your education about how this idea works.
I'm not suggesting that you should actually do this, or that you should actually execute the illustrated example.
This is just an educational exercise. I'm not your adviser, broker, financial planner, etc.
Do your own homework so you become comfortable with this concept.
