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Since the Federal Reserve cut its target benchmark interest rate to 0%-0.25% in March, it has become virtually impossible to generate enough income from treasuries, bonds, or CDs to help your equity portfolio weather another COVID-19 crash…
But with this one simple options income strategy, you can generate yield 20x the fed funds rate – no matter which way the market turns next.
These extra returns could mean the difference between going positive or negative for the year.
Here’s exactly how to do it…
Sell Puts When You Buy Your Next Stock
Selling puts is a risk-free a way to lower your cost basis every time you plan to purchase 100 shares of your next stock… Or collect free income if the contract expires worthless.
Here’s a real-life example: Let’s say you’re interested in purchasing 100 shares of Square Inc. (NYSE: SQ) stock, currently trading for $100 per share…
But you don’t want to use a market order to pay $100 per share. You’ve identified $97 as your price target, but you don’t want to place a limit order either…
Instead, you could sell one SQ July 2, 2020 put option at a strike price of $100 – which is currently trading for $3.
Since that one put options contract controls 100 shares of SQ stock, that means you would receive a $300 “premium” from the counterparty on other end of the trade buying the contract from you.
If the option contract expires “in the money,” you get to buy 100 shares of SQ for $97 on July 2 – instead of paying $100 per share today.
That means you saved $300 (or 3%) on your purchase while taking zero additional risk.
Here’s how it could get even better…
If the option expires while the share price is above the strike price of $100, referred to as being “out of the money,” you get to keep the $300 premium without having to buy the stock.
That means you generated 3% yield for free, in just 2 days – which is 20x what you would earn owning the 3-Month U.S. Treasury (yielding a measly 0.15%) for its duration.
As you can see, it’s a really simple tactic you implement every time you plan on buying 100 shares of your next stock.
Worst case scenario: You get a discount on the new shares of stock you were planning on buying anyway.
Best case: You collect 20x additional yield for free. And then you can use that to sell another put option to generate additional income.
It’s really a win-win tactic that all the top institutional investment managers employ regularly.