Options are an amazing asset class, that once understood, can create many possibilities to profit in the markets. A lesser known options strategy is selling a Cash Covered Puts as a way to buy stocks at a discount.
This strategy is similar to a covered call in risk/reward profile if done conservatively without using margin. Sell puts to get into a position and then sell calls against that position to get out of it.
The safest way to play this strategy is only on stocks you like and would like to buy anyway and only to the level equal to the cash you have in the account. This strategy has the same risk/reward profile as covered calls done without margin. Never use margin until you have more experience and a bigger trading account.
Like covered calls, this strategy allows you to make money if the stock goes up, down a little bit, or sideways. It is a non-directional strategy.
In this strategy, you sell a put which obligates you to buy the underlying at the strike price. So let’s say you really want ABC stock at its current price of $48. Instead of pulling the cash out of your account to buy ABC at $48, you sell a $45 put which obligates you to buy ABC stock at $45.
Selling a put pays you a premium and you only buy ABC stock if it goes on sale down to $45. It’s possible to keep selling puts on a stock you like over and over until you get put the shares at the strike price you set. Imagine earning a few bucks a week on a stock you don’t own simply for being willing to buy it at a lower price than it currently trades…and repeating this process until you end up with the shares.
For those who focus only on generating cash flow, this is a great way to get paid (and maybe get paid multiple times) to get into a position. Once you own the stock, keep writing yourself weekly or monthly paychecks by selling covered calls until the stock is called away. Then repeat over and over again.