That is unless you’re using a put selling strategy…

As an option trader, you can take the transaction one step further by selling a Microsoft $20 put option contract – you’ll receive the going rate for that option and receive instant income.

I recently showed Investment U readers some of the ins and outs of put options – you can read all about them, but right now I’m going to show you how to profit from a real life example of selling puts options.

Selling Naked Put Options – Strike Prices & Option Chains

When selling naked put options, it can be hard to grasp how the strike prices and contract prices work together until you understand what an option price list – or option chain – looks like.

Take a look at Microsoft’s option chain below:

Chart: http://www.investmentu.com/images/iu062909chart.gif

This is a typical option chain for Microsoft options that expire in January 2010.

• The strike prices are listed in the column in black. Since we’re interested in the $20 strike price, we look at the JAN10 20.00 line.
• Scan over to the “bid” column that shows how much you can receive for selling that $20 put option contract. The bid column shows $1.30 as the price. This translates into $130 you will receive for every $20 put option contract you sell because all prices are in listed in per share costs. And an option contract controls 100 shares of stock.
• For a typical 1,000 share stock trade, you can sell 10 put option contracts and instantly receive $1,300 in your account, no questions asked.

This is money for you to use anyway you see fit. No matter what happens, this money is yours.

In exchange for selling those 10 put option contracts and receiving your instant $1,300, you are obligating yourself to buy 1,000 shares of Microsoft at a price of $20 per share until the expiration day in January 2010.

At this point, you know ahead of time that you will be obligating yourself to buy 1,000 shares of Microsoft at $20 per share, for a total investment of $20,000.

Not only do you get to collect $1300 upfront just for placing the option trade, but you’re also giving yourself a chance to buy a stock that you want to own, at the price you want.

How great is that?

As long as you know this potential future transaction is within your financial means and trading plan, then it is a win-win situation for you.

When Selling Options, What Happens On Options Expiration Day?

So, when selling put options or any options, people often ask what happens when options reach their expiration date?

Only two things can occur at expiration – either the price of the stock is above the chosen strike price or it’s below.

• If the stock finishes above the strike price, then the trade is over and the option expires worthless. The option buyer walks away with nothing while the option seller gets to keep the upfront cash with no further obligations.
• If the stock finishes below the strike price at option expiration, the option buyer will “exercise” his right to the contract and you will be required to fulfill your end of the agreement – which means you end up having to buy a stock you wanted at the price you wanted.

Sounds pretty good to me. And all the while you still get to keep the upfront cash.

So in the case of our Microsoft example above…

• If Microsoft closes below $20 in January 2010, you will be obligated to purchase your 1,000 shares at $20 each. With the $130 received upfront for each option contract, this essentially reduces your cost basis to $18.70 per share once the transaction is complete. Not bad.
• If Microsoft closes above $20 at January 2010 expiration, the trade is over and the option expires worthless. You keep the $1,300 and are free to repeat the process again for another expiration period. This is the key to income generation.

As I mentioned in my article about selling naked put options article that up to 90% of option contracts will expire worthless, leaving you with the upfront cash payment.

After implementing this strategy for a while, you will come to see that most of the trades will expire and you’ll keep padding your account with instant income.

Using a Put Selling Strategy – Six Tips to Selling Options

A few guidelines to keep in mind when selling naked put options:

• Only sell put options on stocks you want to own. Do not use this options trading strategy on high flyers just to receive the upfront income.
• Only sell enough contracts to stay within your comfort zone. If you normally trade in 500-share blocks, then only sell five option contracts.
• If you are uncomfortable at anytime during the trade, or do not wish to own the stock at the strike price you’ve chosen, then you can unwind the trade at any point. All you have to do is buy back the put options you’ve sold.
• The option price will fluctuate during the course of the trade. It may get cheaper or more expensive while you hold it. The bottom line is – you’ll either get to buy the stock at expiration or the option will expire with no value.
• You will need to have an approved “option trading account” with your broker. This needs to be set up before making these transactions.
• You’ll always know ahead of time what your potential total outlay will be if obligated to buy the shares. No surprise endings.

That’s all there is to selling put options. It’s easy, simple and much safer than most investors imagine if you just stick to my six tips above.

Using Put Options With The Instant Money Trader

These are the profitable types of trades we execute in The Instant Money Trader service.

In fact, since launching in November 2008, we’ve had a 100% win streak, meaning all the options have expired worthless, allowing us to bank all the money paid to us upfront from the option buyers.

Although we concentrate on selling put options on high quality stocks within the Dow Industrials and S&P 500 that we’d be more than happy to own, we’ve yet to have to fulfill our obligation and purchase them.

This is mostly because we sell the put options that have the high percentage of expiring worthless. It’s fine with us, as we’ll gladly keep accepting all the instant money we get from these transactions.

We’re able to pick quality stocks that are paying good money to us, all the while knowing that we’ll either take possession of these great stocks or repeat the process for the next month.

Good investing,

Lee Lowell

Source: Using a Put Selling Strategy: A Step-By-Step Lesson On Selling Options

This stuff is the vintage of the famous Napa Valley, California… hand-blended from a noble mix of specially grown Bordeaux vines, the very same stuff served in the White House to the world’s most prestigious guests.

Even so, it’s had a tough time of late. For reasons you’re about to see their share price nosedived a couple of years back.

But they’re back on track and I think they present a golden opportunity for quick-thinking profit seekers.

I’m not kidding… their share price could go BALLISTIC in the next 12 months if everything goes to plan.

How much do I think the share price could shoot up? Find out here.

Behold the power of ‘recovery plays’

I was a wild-eyed trader for Mullens & Co when I first discovered the money-making power of ‘recovery play’stocks…

Situations where, for whatever reason – an unexpected drop sales; the sudden loss of a few major contracts; a management blunder; an accounting cock-up – a firm’s profits (and share price) have taken a major hit.

Take Reuters… the financial info provider was a dead company walking in March 2003 when shares fell 80% to 96p. After serious management surgery, Reuters breathes still – and the shares have recovered 557%.

And what about Next? It was curtains for the clothing retailer in the 90’s when shares slumped to 12.5p. Today a Next share costs £12.27… a miraculous 9,716% return from the grave!

It’s fairly clear… companies in trouble – which are misjudged by the market – can be prolific money-makers if they successfully turn things around.

And that’s exactly why I believe the fine winemaker I’d like to reveal to you today is MASSIVELY undervalued.

After 14 years of sound management, good profits and a £28 million AIM valuation… along comes this company’s ‘annus horribilis’…

In 2006 in steps a new chief exec.

Within one year he managed to wreck relations with their biggest distributors… reverse their record of exceptional growth… and run up a loss of $6 million on sales that were DOWN by 14%.

Today their market cap stands at £3.93 million.

But get ready for the rebound of the century!

I believe we’re about to witness an exceptional comeback with this stock. Okay, it’s a tiny, tiny company. The risks are high. And I would only recommend a miniscule percentage of your capital to be put on this. But if it comes off the rewards could be spectacular!

Investors who buy in now could be laughing in a year’s time!

You see, the original backer of the business has taken back the reins… and boy is he fired up!

He’s already mended relationships with their distributors, which accounts for over 60% of this winemaker’s sales… and he’s shored up the company’s finances with the sale of valuable land and assets in a deal that gives them an option to buy it all back at a cut price five years down the line.

Results from 2007 ALREADY show they are back on track!

The management’s improved no end too… new financing arrangements have reduced debt… and after a strong Christmas period and a good start to 2008 there are NO signs of the wider economic climate affecting sales.

I’ll be revealing the identity of this corking winemaker in my next edition of RED HOT PENNY SHARES, which hits doormats first thing tomorrow.

But you can read about it right away!

To find out what you need to do, and EXACLTY how much I believe this share could make, click here NOW.

Tom Bulford
for The Penny Sleuth