There are times when the use of options are a means of acquiring a stock or Exchange traded fund at a discounted price to the current market price. I will explain a method that I often use for specific investment portfolios. If you plan to use options you should read and understand the options risk disclosure that your broker or advisor must supply to you.
In my examples, I will use stocks for explanation purposes only, I am not making a recommendation of these stocks.
Example #1:
A client owns shares of Apple, and would like to accumulate more, but would obviously like to buy lower. Apple stock trades at $188.00. I can sell, on my client’s behalf the June 28th , 185 put that expires in about six weeks, and collect about $550.00 per contract. A contract represents 100 shares and the $185 is the strike price. Two outcomes of this strategy are 1: Apple stock stays above $185 and on June 28th the option contract expires worthless to the buyer, but my client was the seller of the contract, so they keep the premium of $550.00 per contract sold. 2: Apple stock price drops below $185, but the client’s breakeven price is the strike price of $185 minus the premium of $550.00 collected for a price of $179.50 minus any transaction fees.
This is a very effective means of collecting premium or buying stocks or ETF’s that you would have wanted to purchase at a lower price than current market.
Example #2:
Same client owns Apple but would not mind selling some of the position. Apple is trading at $188 but we would like to get $190. We sell the June 28th $190 call for about $615. If the stock trades over the $190 strike price it may get “called” away, but the client collected $615 for the premium bringing their sell price to $196.15 less transaction fees. If the stock trades below $190 my client keeps the premium and the stock.
These transactions can be advantageous for a client who wants to build a portfolio of stocks and ETF’s or to the client that already has a position in these stocks and would like to create added revenue. I find options a very efficient means of getting cash into the equity markets and most advisors will tell you that it can be a challenge when the markets are fully valued. The client either gains revenue, buys or sells the underlying investment with the addition of having the cash in a money market waiting to be deployed.
The call sold on Apple is considered covered because the clients owns the underlying stock, the puts are cash covered and if you are prepared to own the stock at the strike price, your risk is mitigated. Uncovered calls place you at unlimited risk and I would not recommend. You should review the options risk disclosure document before deploying any options strategies.
Before you use options, make sure that you understand them and make sure that your broker is experienced in these types of transactions. You do not want to be the guinea pig.
