The Put-Sell Trade: How to Buy Gold and Silver for a 16% Discount
by Lee Lowell, Stock and Commodity Option Specialist
Monday, November 9, 2009: Issue #1133
No matter what the stock market is doing, this is one of the best strategies you can use.
It not only allows you to buy stocks for the price you want (at big discounts), but pays you for it, too.
I’m talking about put-selling – a strategy I discussed a few weeks ago, when I showed you how to buy gold.
When executing a put-sell trade, you should try to find a stock that you want to buy at a certain price and then sell the corresponding put options as your trade. You’ll receive cash upfront from the put-option buyer as a payment for your potential obligation to buy the shares at the price you choose. It’s a way of taking a neutral-bullish stance by way of the options market.
Here’s how our gold trade is working out, plus a new one on silver…
Shooting for a Discount On Gold
In our hypothetical put-selling gold trade, we used the SPDR Gold Shares (NYSE: GLD):
- We sold the December 2009 $91 put option (GLD-XM) for $1.40 per contract.
- This immediately deposited $140 per contract into our trading account.
- For every put-option contract you sell, you’re obligated to potentially buy 100 shares of GLD at the $91 strike price.
- So if you sold 10 put-option contracts, you’d receive $1,400 and you’d then be obligated to potentially buy 1,000 shares.
In our GLD trade, we came to the conclusion that we’d be happy to buy the stock, but only at $91 per share. This was roughly $6 cheaper than where GLD was trading at the time, and it also corresponded to the 200-day moving average support area.
Three Put-Sell Trade Scenarios
With gold rising recently, the corresponding GLD shares (GLD tracks the price movement of gold futures) have moved from $97 to $107. And when the stock moves up, the put-option prices get cheaper.
To see the chart in its original size, click here.
We have three put-sell trade choices at this point:
- Buy back the options for cheaper than what we originally sold them for, hence locking in a profit. Currently, the December 2009 GLD $91 puts are worth $0.15 per contract. So we could buy the option back for $0.15 and close out the trade completely. This would lock in a profit of $1.25 per option, which translates into a dollar gain of $125 per option. If you sold 10 contracts, that would give you a gain of $1,250… free and clear.
- Continue to wait until options expiration to see if the options will expire completely worthless.
- If GLD actually finishes below $91 per share by expiration, we’ll be obligated to buy GLD at the price we want – $91. But the chances of that happening are slim.
Okay, so with that ongoing, let’s hit the silver market and see if we can turn a profit with the put selling strategy too…
A Put-Sell Trade On Silver
Since silver prices move in tandem with gold, it’s also trekking higher. The main exchange-traded fund that tracks silver futures is the iShares Silver Trust (NYSE: SLV).
To see the chart in its original size, click here.
If you think silver will continue to move higher, but want to get long at cheaper levels, you can adopt the same approach here as with gold: sell an SLV put option at a level where you want to buy the stock.
With silver futures currently near $17.40 per ounce, SLV is trading about $17.10 per share. SLV’s value is roughly the same as silver futures, whereas GLD’s value is roughly one-tenth the size of the gold futures price.
Regardless of the ratios, you can still sell put options to meet your needs. So let’s say we feel silver would be a good potential buy near $15 and take a look at a hypothetical put-sell trade.
- The April 2010 $15 put option (SLV-PO) is currently worth about $0.70 per contract. So for every option you sell, you’ll receive $70. If you sell 10 options, you’ll receive $700.
- With SLV trading at $17.10 per share, you’d then be obligated to buy SLV shares at $15 if it trades down to $15 at option expiration. If SLV stays above $15 over the course of the trade, then the options will expire worthless.
The Put-Sell Trade Bottom Line
When it comes to put option selling, as long as you’re comfortable with the potential buy area that you choose, it’s a great trade to execute. Not only do you get immediate cash when you execute the trade, you also lay the foundation to buy a stock you want at the price level you desire and lower your cost, too.
Good trading,
Lee Lowell
Editor’s Note: Lee Lowell is the stock and commodity options expert at the Xcelerated Profits Report (XPR), where he initiates put-sell trades like this. He’s used it to grab a 32% profit on The Gap (NYSE: GPS) and currently has a 40% gain on Intel (Nasdaq: INTC). For more information on the professional investing strategies that the XPR team use – which significantly lower risk and “xcelerate” profits faster than most other investors – check out this report.
- How to Buy Gold… At the Price You Want & Get Paid For It
- Using a Put Selling Strategy: A Step-By-Step Lesson On Selling Options
- Put Option Selling: Get Paid to Buy the Stocks You Want
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4 Responses to “The Put-Sell Trade: How to Buy Gold and Silver for a 16% Discount”
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November 9th, 2009 at 4:57 pm
very interesting
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November 9th, 2009 at 5:44 pm
You overlooked a 4th option on the GLD option trade. After closing the puts @ 10 Cents each, you could roll up the trade to a higher strike price with a new expiration date and again sell the GLD puts and collect the option premium.
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November 10th, 2009 at 1:31 am
My brokerage account rules require me to have cash (or in a money market fund which pays negligible interest in current market conditions)in my account in order to sell a put, which means I cannot do anything else with that money until the term of the put contract expires. If the stock is one that pays a dividend, why not buy the stock and sell a covered call instead of selling a put since you might collect dividends in addition to premiums on the put?
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Investment U Reply:
November 10th, 2009 at 10:48 am
Dave,
Yes, both strategies are valid and pretty much the same thing. The put sell takes into account the ramifications of the dividend, but you cannot do it in all accounts especially retirement accounts. However, it is your broker that puts on the restrictions and you can call Gunn Allen Financial at 800-329-1984 to find out what their policy is. They are a Pillar One partner and offer extremely low commissions for our readers.
As for why to do a put sell in the first place versus a covered call, here is the rationale: A put sell is meant to be a way of tying up less of your cash than owning the shares via a covered call strategy. Since margin requirements usually only require that you have 30% to 40% of the strike price as collateral when you do a put sell, the other monies can be deployed elsewhere and if you are “put” then you have to come up with the difference.
You brokerage account should not require you to have cash to support the transaction, just enough collateral in the form of EITHER cash or securities.
Karim
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