By now I hope you’ve read my recent educational piece on how to sell puts and earn easy income. If not, please refer back to it before reading this article. A few days ago I encouraged you to try selling to open puts on Cisco (CSCO). If you haven’t gotten in or tried it yet, that’s okay. It remains a great stock and a perfect “put” choice whenever Mr. Market loses his mind and decides to make it cheaper. That’s the time to jump in a make some easy moola!
Today, however, I want to offer my 2nd idea to earn easy, substantial income. It involves selling puts on the Coca-cola of the coffee business: Starbucks (stock ticker: SBUX).
Starbucks has been trading in a see-saw, sideways pattern for quite some time. This offers us the perfect chance to earn income and to pick up shares at dirt-cheap prices while waiting for its next major move higher. As a former coffee-slinging barista, I firmly believe that Starbucks will continue expanding around the world and earning caffeinated levels of cash for decades to come. This is a stock everyone should own for the long term.
In light of this, using the template from my earlier educational piece, I will show you exactly how I would (and just might again!) sell to open naked puts this week . . . in 8 simple steps. Here goes:
1. Think of a great stock (company) you’d like to own, ideally one with a healthy dividend and a strong balance sheet. Today (10/18/2012), I’m thinking of Starbucks (SBUX) . . . giddy-up.
2. What is the current stock price? $48.39.
3. Would you like to buy it at a cheaper price? Yes!! Is this a trick question? (Note: this is not a trick question. Safe options literally give you this choice . . . you just have to claim it and collect the money!)
4. Go to your brokerage website and click on “Options trading,” or something similar. Look for the heading “Puts,” “Calls and Puts,” or something similar. Type in your stock ticker. For a time frame, use the next 2-3 months. Got it.
5. Refer to the current price of your stock. Look at how much the market is willing to pay you in 2 or 3 months if you agree to buy it more cheaply than it is priced today. I see that the Jan. 19, 2013 put with a strike price of $47 is going for about $2.00. That means that if I agree to buy 100 shares* of SBUX on 01/19/2013 for $4,700, I will get paid $200 today. . . . Talk about sweet moola!
*Note: When you trade options, you buy and sell “contracts.” 1 contract always equals 100 shares of the stock. Don’t miss this! So when you start learning how to trade options, I recommend only selling one contract at a time.
6. Now, click on Sell to Open Puts (or its equivalent) at the strike price and date (in 2 or 3 months) that you’d like. I did it (seriously, I just did!).
7. Tip: Always select “Limit” order to get a higher and better price for your troubles! For this transaction, I placed a Limit order at $2.40 (or, $240 per contract), which is pretty generous. If the market accepts it, that’s great. If not, I’ll just be patient and wait for another easy income opportunity. I’ve learned that–with a little patience–you can earn much better returns and actually be less stressed-out. A big key to successful investing is learning to use your brain and keeping your emotions at bay!
8. That’s it. You’re done! The market will do the rest. If the market thinks you’ve set a reasonable Limit price then the order will go through and you’ll instantly get the Limit amount deposited into your account. If not, no big deal. Just wait for another day and make a similar offer. Eventually, the market will bite and you’ll be the guy or gal with the big fish! Sweet!
*Your Annual Return. As an aside, for those of you who are less mathematically-inclined, here’s a little info. For your willingness to buy 100 shares of a great company (SBUX) on 01/19/2013 at a cheap price (total: $4,700), you are being instantly paid around $200. This works out to be a return of: $200/$4,700 = 4.3%. A 4.3% return may not sound like much, but remember, you are making this amount in 3 months with very little risk. Your annual (12 month) return is: 4.3% x 4 months = 17.2%, which will make you the envy of your friends, family and stock brokers!
Jeffrey W. Ross, MD is a Motley Fool investment freelancer.