Once I identify that perfect stock, I go to StockCharts.com and study its chart. That website is a wonderful site and should be bookmarked in everyone’s Favorites near the top. What I’m looking for on that chart is the price that would make this stock a real good bargain to buy. A Friday after Thanksgiving kind of bargain. I do that by looking at the moving averages of the stock’s price as well as its associated Bollinger Bands. I most certainly will look at its MACD (moving average convergence/divergence), and I may even look at its P/E (Profit divided by its Earnings) average for historical perspective. I will use whatever means I can to determine the price at which the stock is in essence on sale. When it would historically be considered cheap. And I do mean cheap because I’m cheap. And I’m patient. And you have to be both.
So let’s say that I find that one stock and it’s currently priced at $50, but based on all of my analysis I have concluded that a good sale price would be $45. What’s an investor to do? The normal investor would put a buy in with his brokerage house for 100 shares at $45 and wait. And wait. And wait. He may or may not end up getting it, depending on whether the stock pulls back to the $45 level. If it does, he bought 100 shares at $45 each for a total of $4500. If it doesn’t pull back then he waited for nothing. Nada. Zilch. That strategy may be good for some, but it’s not good for me.
What I would do is sell a Put with a strike price of $45 and collect a premium (fee) of, let’s say, $1.25. Since one option is for 100 shares, I would collect $125. Then I too would wait, just like the guy in the last paragraph. If the stock pulls back to the $45 level, I also would buy 100 shares for $4500 but since I get to keep the $125 fee, I’m out only $4375. Nice, huh? If, on the other hand, it doesn’t fall below $45 per share, I get to keep the $125 just for the waiting. Either way, I’m better off financially than the other guy.
In this example I have literally gone short one Put Option in order to be able to go long the stock. I use this method constantly to get into stocks that I want to own at a price cheaper than it's currently selling for. But with this strategy you have to have patience. It may take you a while to buy the stock but you’ll earn an income (fee) while you wait.
And there’s nothing wrong with making money while you wait!