What If You Could Buy Apple at $375 a Share?

Better yet, instead of simply waiting for a pullback, you could use a put selling strategy, which commits you to buying the stock if it falls below a certain price.

AAPL might be more attractive to you at $400 a share. You could sell a put option on AAPL with a $400 strike price that expires in January 2015 for about $25. If AAPL is below $400 when the option expires, you will buy it at $400, but the $25 a share you received when selling the put will reduce the actual price to only $375.

Just be sure that you understand the risk. If AAPL falls below the strike price, you will be obligated to purchase 100 shares per option sold at $400, costing you $40,000, less the $2,500 received for selling the put, or $37,500. Some traders prefer to set aside the full amount needed to cover this obligation, and your broker will likely require you to deposit a percentage of that obligation in your account, called a “margin requirement.”

This strategy can be applied to any stock, although it works particularly well with high-priced stocks that you would like to own. The premiums received when selling a put on stocks like AAPL, Google Inc (NASDAQ:GOOG) or Priceline.com Inc (NASDAQ:PCLN) can be substantial. That income could help you grow wealth while waiting for value to develop in companies you want to own.

Markets determine price, but the PEG ratio can be used to determine value. High-priced stocks might actually be bargains, like AAPL seems to be, and a put selling strategy can reduce the cost of owning any stock.

Consider selling puts on stocks that you find attractive to generate income and ensure you buy them during a pullback.

This article was originally written by Amber Hestla and posted on ProfitableTrading.

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