Do you want to generate income while possibly acquiring stocks at a discount? The cash-secured put strategy is one that seasoned investors often utilize, and it may be a game-changer for your portfolio. But what exactly does it mean to sell a cash-secured put? And how can you effectively implement this strategy in your investment journey? Let’s dive in.
First, you need to understand what a put option is. A put option is a contract that gives the holder the right, but not the obligation, to sell a specified amount of an underlying asset at a specified price (strike price) within a certain period of time (expiration date).
Now, when you sell a put option, you are selling this right to someone else. In return, you receive a premium. The key element of the cash-secured put strategy is that you hold enough cash to purchase the shares if the option holder decides to sell them at the strike price.
You might ask, “Why would I want to take on this obligation?” There are two key reasons. First, you receive a premium, which you get to keep regardless of what happens to the stock. Secondly, if you are bullish on a stock and wouldn’t mind owning it, you can use this strategy to potentially buy the stock at a lower price than its current market value.
Let’s illustrate this with a hypothetical example.
Imagine a company named “Blue Chip Tech,” currently trading at $100 per share. You are optimistic about the company’s long-term prospects but feel that $100 is a bit expensive. Here’s where the cash-secured put strategy comes in.
You decide to sell one put option of Blue Chip Tech with a strike price of $95 and an expiration date one month away. The option is trading at a premium of $3. Since each options contract corresponds to 100 shares, you receive $300 ($3 x 100 shares) in premium income.
By selling this put, you are committing to buying 100 shares of Blue Chip Tech at $95 per share if the stock price drops below this level before the option expires. Therefore, you need to have $9,500 in cash (the cash-secured part) set aside for this potential obligation.
So, what are the possible outcomes?
Index funds are a way to build exposure to the broad market for a low cost. They provide instant diversification and the ability to invest in a wide variety of assets within a single investment product.
When it comes to index funds, however, not all of them are created equal. Some index funds will track different indexes and invest in assets besides just stocks, while others may have higher costs and may be more or less diversified.
That’s why I wanted to discuss five index funds today that can widely diversify your portfolio for a low cost, across the entire U.S. stock market. Let’s get started!
Here are five low-cost index funds that provide exposure to the U.S. equity market:
- Vanguard Total Stock Market Index Fund (VTSAX): This fund seeks to track the performance of the CRSP US Total Market Index, which includes almost all publicly traded US stocks. The expense ratio is 0.04%, making it one of the lowest-cost index funds available.
- Schwab Total Stock Market Index Fund (SWTSX): This fund tracks the performance of the Dow Jones U.S. Total Stock Market Index and has an expense ratio of 0.03%. It provides broad exposure to the U.S. stock market, including large-cap, mid-cap, and small-cap stocks.
- iShares Core S&P 500 ETF (IVV): This ETF tracks the performance of the S&P 500 index and has an expense ratio of 0.03%. The S&P 500 is one of the most widely recognized benchmarks for the U.S. stock market and includes 500 large-cap US stocks.
- Fidelity Total Market Index Fund (FSKAX): This fund seeks to track the performance of the Dow Jones U.S. Total Stock Market Index and has an expense ratio of 0.015%. It provides broad exposure to the U.S. stock market, including large-cap, mid-cap, and small-cap stocks.
- SPDR S&P 600 Small Cap ETF (SLY): This ETF tracks the performance of the S&P SmallCap 600 index and has an expense ratio of 0.15%. The S&P SmallCap 600 includes 600 small-cap US stocks and provides exposure to this segment of the U.S. equity market.
You could mix and match these ETFs and mutual funds however you please, based upon your investing goals, objectives and risk tolerance. If you only wanted to invest in one of them for example, you’re still investing in a highly diversified fund, and thus are spreading out your risk across a wide portion of the market. By dollar-cost averaging on a regular basis and investing in any combination of these funds, you can build a highly diversified portfolio that lasts for years and decades to come.
You can even get started investing today with an online discount broker if you choose. It’s a fast and easy way to get instantly diversified in the market, and many online discount brokers these days do not even charge fees or commissions for investing in the above funds!
- Blue Chip Tech stays above $95 until the expiration date: You get to keep the $300 premium, and the put option expires worthless. Your return is 3.16% ($300/$9500) for the month, which is equivalent to an impressive 37.9% annualized return.
- Blue Chip Tech falls below $95 at the expiration date: You are obligated to buy 100 shares at $95 per share, for a total of $9500. However, you still get to keep the premium, effectively reducing your purchase price to $92 per share ($9500 – $300/100 shares). You now own a stock that you like at a lower price than its original market value, while also getting paid for the process.
To implement a cash-secured put strategy effectively, you need to identify stocks that you genuinely believe in and would be happy to own. Ensure that the premium you receive compensates for the risk you are taking, and always have the cash to secure the put option, in case the stock price falls below the strike price.
It’s essential to remember that the cash-secured put strategy involves risk. The stock may fall significantly below the strike price, meaning you’ll own a stock that is worth much less than you paid for it. This strategy also ties up a significant amount of cash, which could otherwise be invested elsewhere.
Before entering into any options contract, it’s crucial that you understand all the risks involved. Investing in options is not suitable for everyone. If you’re uncertain, it’s always a good idea to consult with a financial advisor.
In summary, the cash-secured put strategy can be a powerful tool in your investment arsenal. It allows you to generate income from the premium and potentially buy stocks at a lower price. By understanding and implementing this strategy, you can take a step towards becoming a more confident and successful investor.
Index funds are a way to build exposure to the broad market for a low cost. They provide instant diversification and the ability to invest in a wide variety of assets within a single investment product.
When it comes to index funds, however, not all of them are created equal. Some index funds will track different indexes and invest in assets besides just stocks, while others may have higher costs and may be more or less diversified.
That’s why I wanted to discuss five index funds today that can widely diversify your portfolio for a low cost, across the entire U.S. stock market. Let’s get started!
Here are five low-cost index funds that provide exposure to the U.S. equity market:
- Vanguard Total Stock Market Index Fund (VTSAX): This fund seeks to track the performance of the CRSP US Total Market Index, which includes almost all publicly traded US stocks. The expense ratio is 0.04%, making it one of the lowest-cost index funds available.
- Schwab Total Stock Market Index Fund (SWTSX): This fund tracks the performance of the Dow Jones U.S. Total Stock Market Index and has an expense ratio of 0.03%. It provides broad exposure to the U.S. stock market, including large-cap, mid-cap, and small-cap stocks.
- iShares Core S&P 500 ETF (IVV): This ETF tracks the performance of the S&P 500 index and has an expense ratio of 0.03%. The S&P 500 is one of the most widely recognized benchmarks for the U.S. stock market and includes 500 large-cap US stocks.
- Fidelity Total Market Index Fund (FSKAX): This fund seeks to track the performance of the Dow Jones U.S. Total Stock Market Index and has an expense ratio of 0.015%. It provides broad exposure to the U.S. stock market, including large-cap, mid-cap, and small-cap stocks.
- SPDR S&P 600 Small Cap ETF (SLY): This ETF tracks the performance of the S&P SmallCap 600 index and has an expense ratio of 0.15%. The S&P SmallCap 600 includes 600 small-cap US stocks and provides exposure to this segment of the U.S. equity market.
You could mix and match these ETFs and mutual funds however you please, based upon your investing goals, objectives and risk tolerance. If you only wanted to invest in one of them for example, you’re still investing in a highly diversified fund, and thus are spreading out your risk across a wide portion of the market. By dollar-cost averaging on a regular basis and investing in any combination of these funds, you can build a highly diversified portfolio that lasts for years and decades to come.
You can even get started investing today with an online discount broker if you choose. It’s a fast and easy way to get instantly diversified in the market, and many online discount brokers these days do not even charge fees or commissions for investing in the above funds!
