Monday, November 9, 2009: Issue #1133

No matter what the stock market is doing, this is one of the best strategies you can use.

It not only allows you to buy stocks for the price you want (at big discounts), but pays you for it, too.

I'm talking about put-selling – a strategy I discussed a few weeks ago, when I showed you how to buy gold.

When you execute a put-sell trade, you should try to find a stock that you want to buy at a certain price and then sell the corresponding put options as your trade. You'll receive cash upfront from the put-option buyer as a payment for your potential obligation to buy the shares at the price you choose. It's a way of taking a neutral-bullish stance by way of the options market.

Here's how our gold trade is working out, plus a new one on silver…

Shooting for a Discount On Gold

In our hypothetical put-selling gold trade, we used the SPDR Gold Shares (NYSE: GLD):

• We sold the December 2009 $91 put option (GLD-XM) for $1.40 per contract.
• This immediately deposited $140 per contract into our trading account.
• For every put-option contract you sell, you're obligated to potentially buy 100 shares of GLD at the $91 strike price.
• So if you sold 10 put-option contracts, you'd receive $1,400 and you'd then be obligated to potentially buy 1,000 shares.

In our GLD trade, we came to the conclusion that we'd be happy to buy the stock, but only at $91 per share. This was roughly $6 cheaper than where GLD was trading at the time, and it also corresponded to the 200-day moving average support area.

Three Put-Sell Trade Scenarios

With gold rising recently, the corresponding GLD shares (GLD tracks the price movement of gold futures) have moved from $97 to $107. And when the stock moves up, the put-option prices get cheaper.

To see the chart in its original size, click here.