Know Why You're Selling Puts - Income vs. Discounts

How to Find Great Put Selling Trades
(Part 2 of 3)

In Part 2 of this 3 part series on finding great put selling trade ideas, we need to have perfect clarity why we're selling puts in the first place - for income or for discounted stock acquisitions?

(In Part 1, I make the case for constructing your own personal watch list of stocks you actively monitor for attractive put selling opportunities, and in Part 3, we discuss the importance of flexibility and understanding that the stock market is one part math, one part psychology.)

Mastery Requires Clarity

Successfully - and profitably - selling puts is like any other skill - it's learnable.

I make this point all the time - in any area of our lives where we're proficient at something, it's because we have clarity about that area.

It's not random or arbitrary, and it has nothing to do with luck.

We simply understand that thing at a deeper level than do most other people.

So - and this makes sense - if you want consistently successful results selling puts (or covered calls for that matter), you need to possess clarity.

The only problem is that clarity is rare - not just when it comes to selling puts, but when it comes to most of life.

In fact, that might be a really good definition of the crowd - a majority of the population that has only a superficial understanding of any given topic or discipline.

But what they do have is conventional wisdom - which, of course, is almost always wrong.

Or irrelevant.

Put Selling Conventional Wisdom

Case in point - any time the topic of selling puts comes up, you're almost always guaranteed to hear someone say something along the lines of:

"Only sell puts on stocks you don't mind owning."

Please. What does that even mean? That's like saying you should only sleep with people you don't mind marrying.

How does that improve your dating life OR your prospects of finding a soul mate?

The first piece of put selling advice you should take to heart is this:

Know exactly why it is you're selling puts in the first place.

And there are only two viable reasons . . .

Reason #1 - Selling Puts for Income

Selling puts is often compared to being your own miniature insurance company.

But instead of insuring someone else's car or house or life, you're insuring the share price of their stocks.

If the stock in question cooperates, you can make some very good short term returns.

And this has nothing to do with owning the shares.

When Allstate or State Farm or Geico insures your car, it's not a clever ploy on their part to gain possession of your vehicle at a less than fair market value.

They're simply trying to turn a profit.

If you're primarily drawn to put selling because of the great short term income the strategy can produce, don't feel guilty about that.

And you don't have to limit your put selling "clients" to only those stocks that you think others would approve of as suitable long term investments

At the same time, since it is about making money, quality does come into play, as does a number of other factors that you want to line up in your favor as much as possible.

And inside the Leveraged Investing Club - specifically, in the training included in the Sleep at Night High Yield Option Income Course - we take things a step (or three?) farther.

The Course (when it's periodically available), doesn't just show you how to sell puts as though you were a generic insurance company.

Not in the least.

I show you how to transform yourself into "The Insurance Company from Hell" where your objective is to collect lots of premium and then avoid like the plague ever paying out a claim.

(Which I define as either buying back your short puts for a loss or allowing yourself to be assigned the shares against your will.)

When you have the necessary clarity, you discover that selling puts is not just a forgiving strategy - it's amazingly flexible one that allows you to repeatedly "renegotiate" the insurance policies you write to your advantage

As many times as it takes.

There are no guarantees about anything in life, but it's extremely rare that we ever book a loss at the end of the day selling puts.

(Check out this seminal "Heads We Win, Tails Mr. Market Loses" article and see for yourself.)

So there's no shame in selling puts for current, high yield income - and with no intention or willingness on your part of ever owning the underlying shares.

But if you do like the idea of outsmarting Mr. Market and acquiring shares of a stock at a steep discount, selling puts is a really good way of doing just that.

Reason #2 - Selling Puts to Acquire Discounted Stock

First, a disclaimer - I'm not talking about generic put selling here.

To be sure, the superficial crowd has a generic use of puts to generate small, one time discounts on a stock.

I could explain it, but, honestly, it bores me.

(If you want to learn more about the generic approach, this Investment U article has you covered.)

As you might imagine, inside The Leveraged Investing Club, we drill deeper.

Small, one time discounts are better than nothing, of course, but we strive for much better deals.

I used to do a Secret Seminar occasionally on a very simple, meachanical approach to manufacturing your own "Sweetheart Deals" on your favorite stocks.

It included a video and report.

I now offer that report for free on this page.

It's a good introduction to what's possible for long term investors with a more substantive understanding of writing or selling puts.

vIt's not exactly what we do inside The Leveraged Investing Club, but it's a heckuva lot better than the generic put selling nonsense.

My point is this: You don't have to settle for small, one time discounts, and you don't have to settle for the "wisdom" of the herd.

Putting It All Together

When you have clarity about something, everything tends to fall into place.

After all, the profoundest truths are always simple (simple, not simplistic).

In this case, the process is very straightforward:

  • Choose whether you want to sell puts for current, high yield income, or whether you want to sell puts in order to acquire shares of your favorite stocks at extreme discounts
  • And then focus on learning how to maximize your effectiveness in getting the job done
  • Next, we continue our conversation on finding great put selling trades with a discussion of a crucial quality for you to possess (and it's not patience or discipline, although those are nice to have, too).

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Warren Buffett Zero Cost Basis Portfolio Current Equity Holdings:

KO - 125 shares
KMI - 100 shares
BP - 100 shares
MCD - 30 shares
JNJ - 25 shares
GIS - 25 shares
PAYX - 25 shares

Open Market Purchase Price: $20,071.83

Less Booked Option Income: $16,341.71

Tot. Discount: 81.42%
Adj. Div. Yield: 19.59%