So sometimes, when there’s nothing on television, I spend my time looking at lists of stocks to find just that one right stock to add to my collection. I’m looking for the kind of stock that consistently increases its sales, earnings and dividends over time and has an expectation to continue to do so well into the future. You know, that one stock that’s gonna increase 10 fold and let me retire on a big ranch in the beautiful Hill Country of Texas or on one of the beautiful lakes located in Texas.
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!