This Simple Trade Can Earn Big Profits

Selling put options is a great way to generate income and solid annualized returns by taking less risk than owning the same amount of common stock long. When I look for these trades I target earning 2% or more for every 30 days of expiration time.

Selling a put option is a strategy where you are slightly bullish on a stock and this reduces your risk by being able to name the price (called the strike price) you are willing to pay for the company. This contract is valid for a specific amount of time called the expiration date.

These terms are set by you and for agreeing you are paid upfront for the potential obligation to buy 100 shares of stock for every put sold. I typically look at options expiration dates between two weeks and two months.

Here is a real time example.

U.S. housing market is very strong today and presents a good opportunity to trade the iShares U.S. Home Construction Fund (ITB). The fund holds a basket of 46 companies including the major home builders such as DR Horton, Lennar, NVR and home improvement Lowe's and Home Depot.

The chart below shows the shares are trying to break out to new highs providing a nice floor around $60.

Trade details:

Sell to open February 19, $60 put for $1.25 using a limit order. You will be paid 2.1% upfront on your $6,000 purchase obligation (100 shares per contract times $60).

If shares are above $60 on expiration day: put sellers will keep the $1.25 free and clear for a 47% annualized return.

If shares are below $60 on expiration day: put sellers will buy shares at a 3% discount to yesterdays closing price including the premium ($1.25) received.

For protection use a stop loss at $51 as shares will be below the 50 day moving average and below the recent price consolidation box. Should this occur you will realize a 13% loss on your adjusted cost basis ($60 - $1.25).

If you need more income or just want to take less risk in equities at this time this is a great strategy to add to your tools. Cheers to your health and wealth!

Divider provided by barge

Disclosure: I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article. The information provided should NOT be considered advice. The topics discussed are risky and have the potential to lose a substantial amount. I am not an investment professional and therefore do not offer individual financial advice. Please do your own research before investing.

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