This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Buy Ford at $14.60, Today

I disagree with this notion. While there can be added risk, I don't consider the strategy to be all that bad, or overly risky. In essence, the seller is paid money, (called a premium), for accepting the obligation to buy a specific stock, at a specific price, on a specific day. That doesn't seem all that bad, right?

Although there are some terrible ways to go about using short puts, in many ways it can be a sound strategy. Let's look at Ford for example. We think the stock is eventually going to go higher. The stock has already pulled back about 10% from its monthly highs to its recent low.

Shorting puts as an entry into a long common stock position is a way of saying, "We've had a decent pullback and I'm willing to own the stock on a continued pullback, but I don't want to miss a rally."

That's exactly the situation we have here. The stock has had a decent pullback, and has now caught our attention. But what would stop Ford from dropping another $1, or more? Nothing, really. The same could be said by asking the inverse; what would stop Ford from going up a $1 per share?

So to play the bounce or buy shares at a lower price, selling puts becomes an adequate solution. Let's use the November expiration, nearly three-months away. I picked the $15 strike, meaning I will be assigned 100 shares for each put option sold short if the stock closes below $15 per share on November expiration.

In addition to shorting the $15 puts, I bought the $10 puts for 3 cents. The reason I did this was twofold: To lower the margin requirements and raise the return on invested capital.

I think selling the spread for 40 cents or more would be ideal, which means we are collecting $40 in premium, since you have to multiply the 40 cents by 100 shares. If we are assigned shares of Ford in November, our cost-basis for the position will be $14.60 per share, ($15 minus 40 cents in premium, equals $14.60 per share).

2 of 3

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,173.89 -105.85 -0.61%
S&P 500 1,992.64 -17.76 -0.88%
NASDAQ 4,518.41 -61.3790 -1.34%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs