How To Buy A Stock For A 15-20% Discount

I must admit that when I saw this article.. I was a little dumbfounded, and excited at the same time.

As tough as it is to understand options sometimes, there are times when it’s sort of a no-brainer. I will try to illustrate this concept here. However, a few things have to be pointed out.

1. this is a bullish play and as I see it, a good way to develop a portfolio
2. you need to have enough cash to pay for 200 shares of the stock you are looking at

The best way to describe these plays are by examples.. so I will use a live one as of today.

DRYS – Dryships

I love this stock and think it’s going places.. (even if I didn’t, I’d use it as an example). Right now it’s trading at $7.75 (up 6.41% on the day). Here’s a chart:

Now.. in order to get this stock for a good discount, I will sell 2 options at the same time. I am going to sell the July 7 put/call. This is the prices on those:

Now, focus on this line for minute:

So you can see to sell the $7 strike put and call, I would gain 1.55 (for the call) and .85 (for the put) which adds up to $2.40. That is $240 in my bank account.. thanks very much!

What I will also do is buy 100 of the stock at $7.75 (costing me.. yes.. $775).

Now do the math on that? $775 – $240 = $535. My entry price cost me 45% less then if I had bought the stock alone. Nice eh? Ok that sounds a bit too good to be true.. so let’s play out the scenarios. Remember however.. we got 100 shares for $5.35 when everyone else paid $7.75.

1. Stock goes to $10 by 3rd week of July (options expiry date)

In this case.. since we’ve sold a call option at $7.00.. that little option forces us to sell our 100 shares for $7.00 on the third week of July when the options comes into play. However since we paid $5.35 for them, that’s a 45% profit in what.. 7 weeks? I’d take that anyday!

2. Stock goes to $6 by 3rd week of July (options expiry date)

All of a sudden the stock drops to $6, and since we sold the put option at the $7 strike price, we are now forced to buy 100 shares at $7.00. Sucky eh? Well.. actually no.. now we have 200 shares (the 100 we are forced to right now at $7.00  and the 100 we purchased originally back at $5.35). Simple math means we have puchased 200 shares at an average cost of 6.18 or so. So at this point you have to ask yourself if you are still ‘bullish’ on this stock or not. But more importantly since our average cost is only $6.18, we’re only down .18 a share at this point, or $36.. compared to the rest of the world whom bought 100 shares at $7.75 at the same time.. and they are down $1.75 a share or $175.

I don’t need to tell you that if the stock goes back up to $7.75.. you will have earned $1.57 per share x 200 shares or $314 while the guys sitting on their shares are just now happy to be back at $0. (Oh and by the way? that’s just over %25 percent profit).

I guess it’s like cost averaging which you stock people will know about, and for those of you who don’t know what I mean? Well.. send me an email or comment and I’ll explain. If you’d like to know some more information on this strategy and some additional plays in combination with it.. visit the source at the link below!

How To Buy A Stock For A 15-20% Discount | Phil’s Stock World.