“Consistency Trumps Intensity…. every time!“
I’m not sure who authored this quote. But I’ve kept it posted in my office for years now, reminding me of the importance of consistently doing my best day in and day out.
The concept of consistency applies to so many areas of life. As an endurance athlete, consistent training is the best way to prepare my body for a big race. (Not just a few days of intense distances.)
And when it comes to building your wealth, consistency is just as important!
That’s why consistent investment income is the best foundation for successful wealth building.
When you pull consistent income from the market, you can use the cash flow to cover expenses.
And if you don’t need to spend the income, that cash can then be used to fund new opportunities. This way your investment account is always full of fresh opportunities because you can consistently add cash to new plays.
Today, I wanted to share my favorite strategy for creating investment income in your account. And over the next few days, we’ll cover some of the nuances that can help you grow — and protect — your wealth!
“Put Contracts” for Safety and Speculation
To collect reliable income from the stock market, I use a “put-selling” approach.
While this may sound different from what you’ve done in the past, stick with me. I promise you’ll be glad you did.
A put contract is a specific kind of options contract… And these contracts are simply agreements between traders.
When you buy a put contract, the agreement gives you the right (but not an obligation) to sell 100 shares of stock at a certain price.
Read that again… because it’s important…
Traders buy put contracts to bet on a stock trading lower, or to protect a long-term investment they hold.
If you have a put contract giving you the right to sell shares at $100, and the stock falls to $80, that contract is worth at least $20 per share.
After all, you could buy shares in the open market at $80. And then you could exercise your put agreement which gives you the right to sell the shares at $100. Chalk up a quick $20 profit!
Put contracts trade on the open market just like stocks. And the price you’ll pay to buy or sell these contracts fluctuate. The price for these put contracts depends on the stock price, on investor expectations for how the stock will trade, and a few other factors.
And there are dozens of different put contracts for each actively traded stock. These contracts have different agreement prices (called strike prices), and different expiration dates. (Each put contract has a limited life span and expires on a specific day).
In the next series, we’ll talk a bit more about the market prices for these contracts. For now, I want to explain how these contracts can give YOU income!
Investment Income from Selling Puts
If you own a put, you have the right to sell shares of stock. But for our income strategy we’re going to take the other side of this trade.
You can choose to sell a put contract which simply means that you’re on the other side of the agreement. The buyer of the contract has the right to sell shares of stock. The seller of the contract is obligated to buy those shares if the agreement is exercised.
Important note: You don’t have to own a put contract to sell it. Since this is an agreement between traders, you’re effectively writing a contract and selling it to the other trader. It’s a seamless process in your brokerage account — you simply use the “sell to open” function. (More on this later.)
When you sell a put contract, you receive real cash in your account for taking the other side of this trade.
Now you’re potentially obligated to buy shares of stock. Your broker requires you to keep enough cash or margin buying power on hand in case you are required to buy.
That’s why you should only sell put contracts for stocks that you’re willing to buy. And only use the contracts with an agreement price (or strike price) that you’re willing to pay for your stock.
Here’s What Happens To Your Income Play
If the other trader decides not to sell, your put contract will expire. You’ll get to keep the income you received and you can repeat this process over and over agin.
And if the other trader exercises his right and sells you the shares, you’ll be buying shares of stock that you already wanted to own. (And you’ll buy at a price you already agreed on).
Best of all, you’ll still get to keep the income you received when you sold your put contracts. And that income can help to offset any potential pullback in the stock.
A third potential outcome is to buy your put contract back in the market. This is an easy transaction — just use the “buy to close” function in your brokerage account. Make sure that you buy a contract with the same specifications as the one you sold and your brokerage will close the position.
If you’re just learning about this income strategy, it may sound complicated.
But over the next few days, we’ll cover a bit more on how this income approach works, and how easy it is to use! (Also, you’ll be happy to know you can even use this strategy in an IRA and some 401(k) retirement accounts!)
Selling puts helps me generate investment income for my family. It’s one of my favorite strategies to help build wealth from the stock market. And if you complete one or two trades like this, I’m sure you’ll quickly see why it’s such a powerful tool.
Next up in this series:
- II: Finding the Best Income Plays
- III: How Much Income Can You Make?
- IV: What Happens in a Bear Market?
- V: There’s Always a Catch…