In this article, we’ll explore a more advanced topic: the options market and how you can leverage options to purchase stocks at a discounted price.
Did you know that using options to buy stocks at a discount can be a straightforward and beneficial strategy? However, it’s crucial to recognize the associated risks and employ this tactic as part of a comprehensive plan.
For example, let’s say you’re eyeing a stock trading at around $10, and its value keeps rising without providing an opportunity for you to buy during a pullback. In such a situation, you can examine its options and find that its puts with a strike at $9 cost $1 (note that these numbers are hypothetical).
Now, you have the option to short the put and retain its premium of $1.
Here are your two choices:
- Buy the Stock at a Discount: Purchase the stock for $10, but with the $1 premium from the put, it’s as if you’re acquiring the stock for $9.
- Earn Premium Income: If the stock continues to rise, you earn an easy dollar by leaving the stock alone. However, if the price drops, you’ll have to buy the stock at the $9 strike price, even if the current market value is lower.
It’s essential to remember that you already earned $1 from shorting the put. So, while you bought the stock for $9 in a market where it’s trading around $8, you effectively break even with the $1 premium, and now you own the stock you originally wanted to buy.
Combined Strategies:
This strategy, of course, doesn’t account for costs or fees and is a hypothetical scenario. To minimize risks and maximize profits, it’s crucial to combine this approach with other essential tools like fundamental analysis, technical analysis, and risk management strategies.
If the stock price were to drop significantly, buying it at $9 might not be ideal. Hence, it’s crucial to assess the feasibility of such a scenario through fundamental analysis. Additionally, technical analysis can guide you in determining the point at which it’s worth maintaining your positions.
In conclusion, using options to purchase stocks at a discount can be a valuable strategy when integrated into a broader investment plan. By combining it with other tools and strategies, you can enhance your chances of success in the market.
Thanks for reading!