- Personal Finance»
- Understanding Finance
Buy Stocks and Create Money
Is it possible to just create money? Well in one sense yes. When you go to your bank and get a mortgage, the bank doesn't really loan you money that is in their vault. It is a paper transaction that with the stroke of a pen currency is added to our monetary supply.
So in that sense we can create money, but that is not what I am referring to here. What if we were able to create money within our trading transactions? I am going to detail a trade that I made today that created money. While there is always a degree of risk this was very simple and resulted in $1,100.00 immediate income.
Deals from Amazon
The strategy that I used in this deal was all centered around Options. Options are contracts that control an underlying stock. In my particular example I did this in the ETF market. ETF stands for Electronically Traded Funds. Maybe in another article I will go into detail about ETF's, but for the sake of this article what you need to know is that this strategy will work with individual stocks in the same way it worked here.
I am going to use another term in this post which is the word LEAPS. LEAPS are basically just longer term options. They typically will expire in a year or longer. One important thing to know about LEAPS is that most brokers treat them the same as if you actually own the stock. This is a great benefit for what I am going to show you.
The trade that I made was under the ticker symbol SLV, which is a fund that mirrors the price of Silver. I am personally very bullish on the metals right now and expect gold and silver to continue rising.
I started the trade purchasing 10 SLV LEAPS that have an expiration date of January 2011. This particular LEAP has a strike price of 16. Today SLV closed at $16.78 therefore it is considered an "In the Money" LEAP. I paid $3.70 for each of these LEAPS. Therefore, since each LEAP controls 100 shares of the underlying stock you have to multiply the $3.70 by 10. Therefore, each LEAP cost $370.00 for a total cost of $3,700.00. The higher the price of silver goes the more valuable these LEAPS will become.
The next thing I did was sell (write) 10 SLV October 09 Call options. These options expire the third Friday of next month. I chose a strike price of 17 for these contracts. What this means is that they are Out of the Money call options. If the price of SLV trades higher than 17 these options will become more valuable and the owner of these options can force me to sell to them 1,000 shares of SLV at $17.00 per share.
The price of SLV when I purchased my LEAPS was at about $16.75 when I contracted them. That means that if SLV exceeds 17 and I have to sell the 1,000 shares that I will have only made $0.25 per share or $250.00. However, I sold these Options for $0.65 or $65.00 per contract. Multiplying this by ten I immediately collected $650.00 that no one can take away from me. This is equivalent to a Covered Call only I am using a LEAP to cover the Call Options.
Out of the money Options deteriorate very quickly the last couple of weeks before expiration. Therefore, if SLV continues to hover around in the high $16.00's these Options will expire worthless. Either way, whether the price goes up or the price goes down I will make money.
The next thing I did was to sell (write) 10 SLV Put Options. The strike price of these Options is $16.00. Therefore I have obligated myself to buy 1,000 shares of SLV should the price drop below $16.00 per share. This is a good thing as I want to own this because I believe that Silver will continue to rise in price. If the price of Silver does not drop below $16.00 per ounce then these Options will also expire worthless.
I sold these puts for $0.45 (multiply by 100) or $45.00 each. Therefore, I immediately collected $450.00 in premium. Add the $450 and the $650 above and I have created $1,100.00 in immediate income.
Considering the two directions that the price of SLV can go, the premium collected from the opposite direction Option will become worthless and will increase my overall profit. Let me explain.
First of all we will assume the price sky rockets to $20.00 per ounce. Because I purchased the LEAPS when the price of Silver was around $16.75 I will limit my upside potential profit to twenty-five cents per share or $250.00 plus the $1,100.00 premiums because I was willing to sell Options. Therefore, if the price goes through the roof I will have made $1,350.00.
Next, the price of Silver just bounces around the $16.00 range. Then I created money -- $1,100.00 to be exact, plus I still own the LEAPS and can profit from any upward move in Silver over the next 14 months. I can also repeat process and sell options with the next near term expiration date.
Finally, the price of Silver drops below $16.00. This is where the most risk is, except for the fact that I would like to buy SLV for $16.00. But let's do some math. Considering the premiums I sold for .45 cents and .65 cents, I collected $1.10 per share. Therefore, if I have to buy SLV at $16.00, the price of silver could drop to $14.90 (16.00 - $1.10) before I would lose any money. Therefore, if I didn't want to own SLV, all I would have to do is put a stop loss order above $14.90 and get out before I get into a loss position.
Bottom line is that I created $1,100.00 in income just from the structure. I could replicate this trade several times before the expiration of my LEAPS. If I did this four times averaging $1,100.00 per trade that would be $4,400.00 and I would still own my LEAPS which I could sell for a profit.
Links To My Other Blogs
- How To Buy Stocks at Sale Prices
So you want to be a stock investor? In this blog you will find out how to buy stocks at a discount. Did you know that the vast majority of all online purchases of equities is a "market order." Just in case...
- How To Pay Off Your Mortgage with the Banks Money
Okay, so we know that our home is our castle, but it is also one of the most expensive item the average American purchases. While we have pride-of-ownership in our home and consider it our greatest asset we...
- How to Buy Silver and Gold
If you read my other blog called Financial Advice for a Stock Market Crash you will see how I take the common sense approach to being prepared for a possible stock market crash. As an overall strategy I am...