Ask TheStreet: Put Patrol

Editor's Note: Ask TheStreet is designed to answer questions about the market, strategies and investment methods. Please email us to ask a question, but keep in mind that we cannot offer specific investment advice.

---

Is selling puts a good way to enter a stock? Thanks, J.W.

Gregg Greenberg: Selling a put to enter a stock position is more than just a good strategy, according to TheStreet.com's experts. It's an all-around win-win situation.

James Altucher, hedge fund manager and RealMoney.com contributor, counts only two outcomes from selling puts, and both are favorable.

"In the first scenario, the stock remains above the strike price of the option, the option expires worthless, and we pocket the money we get from selling the option," says Altucher. "In the second scenario, if the stock price falls below the option's strike price, you get "put" more shares -- meaning you're obligated to purchase them -- but at attractively low prices. That's not a bad proposition, because you like the stock anyway, right?"

Right. But you darn well better like the stock, because if it crumbles -- and no stock is immune from crumbling -- you will be put those shares at the strike price. But even in that case you would be better off, since the option premium defrays the cost of being put the stock.

Confused? Don't be. Here's an example, provided by TheStreet.com's options expert Steven Smith, using our old favorite stock, XYZ.

Assume that XYZ Corp. is trading at $47, and you could sell the August $45 put for $1.50 a contract (Each contract represents 100 shares). The breakeven, or effective, purchase price is $43.50, which is 7.4% below the $47 share price.

If XYZ shares are above $45 on the expiration day, you can reap a maximum profit of $1.50 a contract. Note that this maximum profit is achieved even if XYZ declines by 4.2% to $45, or if the shares double to $94.