Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

This Income-Boosting Strategy Is Dangerous Right Now: VMware, Inc. (VMW), Apple Inc. (AAPL)

Page 1 of 2

Investors always like the idea of getting something for nothing. If you’re willing to consider adding options to your investing arsenal, one strategy seems to offer you the chance to get paid to do something you would have done anyway.

As so often happens, though, there’s no such thing as a free lunch on Wall Street. Later on, I’ll explain why this strategy is so dangerous right now, but first, let’s get you up to speed on exactly what strategy we’re talking about and why it looks so attractive.

VMware, Inc. (NYSE:VMW)Buying the dips
Many investors reject options-based investing strategies out of hand, thinking that options are extremely risky instruments that can lose their entire value. But like any tool, options are only as risky as the purposes you use them for. Although you certainly can make extremely high-risk bets using options, other options strategies can actually reduce the risk in your portfolio.

One strategy that many value investors use is called put-writing. To use this strategy, you take a stock that you’re interested in buying but whose price is currently higher than you’re willing to pay. After you choose a lower price at which the stock would be attractive, you then write a put option that allows the option-buyer to sell shares to you at that price.

The strategy has two possible outcomes. If the stock never falls below the strike price of the option, then the put buyer won’t exercise the option. You won’t get the shares, but you will get to pocket the money that you received when you wrote the put. On the other hand, if the stock is below the agreed-upon price, then the put buyer usually will exercise the option. The put buyer will sell shares to you, but it will be at the agreed-upon lower strike price. Moreover, you’ll get an even bigger discount because you still get to keep the money you got when you wrote the option.

Better than limit orders?
Notice how in both cases, you got to keep the proceeds from selling the put option. That makes the put-writing strategy seem a lot smarter than doing what many investors do instead: putting in a limit order to buy shares at a certain lower price. With limit orders, you don’t get paid anything for your commitment.

But limit orders aren’t exactly the same as writing puts. For one thing, as long as the stock price doesn’t trigger the order, you can always cancel a limit order if something fundamental changes about the stock. With put options, on the other hand, you’d have to buy the option back, in some cases paying more than you originally received when you wrote the option. Also, limit orders execute at any time, while options tend to get exercised only near expiration. Therefore, even if the stock temporarily dips, a put option might not get exercised even where a limit order would have gotten cheap shares for you.

Page 1 of 2

Biotech Stock Alert - 20% Guaranteed Return in One Year

Hedge Funds and Insiders Are Piling Into

One of 2015's best hedge funds and two insiders snapped up shares of this medical device stock recently. We believe its transformative and disruptive device will storm the $3+ billion market and help it achieve 500%-1000% gains in 3 years.

Get your FREE REPORT and the details of our 20% return guarantee today.

Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.
Loading Comments...

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 102% in 3 years!! Wondering How?

Download a complete edition of our newsletter for free!