Buy Stock at a Lower Price With Stock Options

When long-run investors want to invest in a stock, they normally purchase shares at the stream commercialize price. But there ‘s a way to buy shares without paying that market price by using stock options. Understanding and knowing how to buy options can give you another creature for your investing toolbox .

Key Takeaways

  • You can use stock options to buy shares of stock without paying the market prices.
  • A stock option is a contract that gives the buyer the right to buy (call) or sell (put) at a specified price, on or before a certain date.
  • Stock options are available on most individual stocks in the U.S., Europe, and Asia, and there are several advantages to using them.

call and Put Options

A stock option is a contract giving the buyer the correct, but not the debt instrument, to purchase or sell an equity at a specify price on or before a certain date. An choice that lets you buy a stock is known as a “ call ” option ; one that lets you sell a stock is known as a “ put ” option. If you do not exercise your correctly under the contract before the passing date, your option expires, and you lose the premium—the amount of money you spent to purchase the choice.

stock options are available on most person stocks in the U.S., Europe, and Asia. You should note that, in addition to the U.S.-style options fair described, there are besides European-style options. They differ from the U.S.-style ones in that you can exercise them entirely on the termination date, not during the time period leading up to it .

How to Buy Stocks by Using Put Options

The stick to scheme for buying a store at a reduce monetary value involves selling put options on 100 shares of a particular stock. The buyer of the options will have the correct to sell you those shares at an agreed-upon price known as the “ strike price. ”

Beginning traders and newer investors may not have the ability to buy and sell options within their trade platform. Consider the best options trade platforms and do your research ahead investing as options come with lots of risk. once you ‘ve chosen a stock that you believe would be worth owning at a particular strike monetary value, there are steps you can take to attempt to carry out this common type of options trade :

  1. Sell one out-of-the-money put option for every 100 shares of stock you’d like to own. A put option is out of the money when the current price of the underlying stock is higher than the strike price.
  2. Wait for the stock price to decrease to the put options’ strike price.
  3. If the options are assigned by the options exchange, buy the underlying shares at the strike price.
  4. If the options are not assigned, keep the premiums received for selling the put options.

Advantages of Options

There are three main advantages of using this stock options strategy to buy shares :

  1. When you sell put options, you immediately receive the premiums. If the underlying stock price never decreases to the put options’ strike price, you can’t buy the shares you wanted but you at least get to keep the money from the premiums.
  2. If the underlying stock price decreases to the put options’ strike price, you can buy the shares at the strike price rather than at the previously higher market price. Because you choose which put options to sell, you can select the strike price and so control the price you pay for the stock. 
  3. The premium you received for the puts provides a small buffer between the purchase price of the stock and the breakeven point of the trade. That means the stock price will have to decline a bit further for the trade to lose money.

A detail Trade Example

Assume that a long-run stock investor has decided to invest in QRS Inc. QRS ‘s stock is presently trading at $ 430, and the future options termination is one month away. The investor wants to purchase 1,000 shares of QRS, so they execute the following stock certificate options barter :

  1. Sell 10 put options—each options contract is for 100 shares—with a strike price of $420, at a premium of $7 per options contract. The total potential amount received for this trade would be $7,000 ($7 x 10 x 100). The investor receives the $7,000 once other investors purchase the options.
  2. The investor waits to see whether QRS’s stock price will fall to the put options’ strike price of $420. If the stock price decreases to $420, the put options may be exercised, and the put options may be assigned by the exchange. If the put options are assigned, the investor will purchase QRS’s stock at $420 per share, which is the strike price the investor chose when they sold the puts.
  3. If the puts are exercised and the investor buys the underlying stock, the $7,000 received for the put options will create a small buffer against this stock investment, becoming a loss. The buffer will be $7 per share: the gain from selling the puts ($7,000) divided by the number of shares (1,000). This means that the investor will break even at a stock price of $413. If the stock drops below $413, the stock investment becomes a losing trade.

If QRS ‘s stock certificate price does not decrease to the place options ‘ strike price of $ 420, the put option options will not be exercised, so the investor will not be able to buy the fundamental stock. alternatively, the investor will keep the $ 7,000 received for the arrange options .

frequently Asked Questions ( FAQs )

How are stock options taxed?

stock options are taxed like stocks. You will face your convention income tax rate on any gains unless you hold the option for more than a year, in which case you qualify for the lower long-run capital gains pace. The strategy discussed here involves selling the option rather than buying and holding it, so it would be considered short-run and be taxed at your normal income rate.

When do stock options expire?

Every option comes with a specific exhalation date ( normally a Friday, though it can be any day ). An American-style option ( park on most fairness options in the U.S. ) can be exercised at any time through the end of the passing date. European-style options ( e.g., on U.S. fairness indexes ) can alone be exercised at passing .

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Category : Finance

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