April 21, 2006, Newsletter Issue #14: Accumulating stock
Tip of the Week
The last option strategy uses options to accumulate stock positions by selling puts to acquire a stock below market value. A put seller takes on the obligation to purchase the shares at a predetermined price (strike price) before or on a future date (expiration date). If by expiration the stock doesn´t pull back to a level where the put buyer wants the put seller to purchase the stock, the put seller simply pockets the premium from the put sale and has no additional obligations. We call this "getting paid to wait." If the stock does pull back far enough and the put is exercised, the put seller must purchase the shares. In this scenario, and similar to the distribution discussion above, the put seller was paid to place a limit order to buy the stock. Furthermore,the put seller acquires the shares at a price below that in effect when the put was originally sold. Plus, he retains the premium from the put sale, which lowers his net cost to acquire the shares.
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