Using the Magic of Put Options to get a good price on your investment.

in LeoFinance2 months ago (edited)

Aloha from Hawaii

Investing in Defiance 5G Next Gen Connectivity ETF.

I read a post by @rollandthomas this week on the Defiance 5G Next Gen Connectivity ETF. This ETF focuses on the companies that are behind 5G technology. In his post he described the impact that 1G, 2G, 3G and 4G technology has had on our lives, both at work and outside work over the last 20 years. He did a very good job of describing how our lives have been changed by technology improvement from merely transmitting the spoken word, to transmitting movies.


I personally think about how we can pick up the phone and call our parents, but also we can send pictures and video our children, plus we can have two way, live video streaming to our parents via 4G technology.

So now that we are about to see 5G technology introduced in 2021, @rollandthomas writes a post describing the opportunity to invest in 5G technology via an ETF or exchange traded fund. This allows you to diversify and these funds traditionally perform better then a random pick of one or two of twelve competitors.

So after reading the article, I want to invest in the ETF, but @rollandthomas indicated that this ETF was trading near it’s high for the year. So based on his chart analysis he recommended waiting until a pullback to $31 to purchase the ETF. So as primarily an options trader I think about selling Puts to buy this ETF at a good price. So that’s the focus of the rest of this post.

Sell a Put on the ETF and get paid to buy at my preferred price.

Plan A

So being an options trader I decided I would buy about 100 shares of this ETF at $31 a share, for to the cost of $3100 and since the price was about $35, I have choices.

I can place a limit order for $31 and wait for the next dip. Or I can sell a put for $31.00. If I sell a 31 dollar Put, I take on the obligation to buy the shares at $31 if the price falls to that level. And because I am selling the Put I am being paid to take on this obligation.

So to put this in perspective, Puts are used by investors as insurance to limit their loss on an investment. If you buy 100 shares of this ETF for 35$ and the price falls to 30$, you lose 5$ per share or 500$. But if you buy insurance against that loss, buy buying a Put, the Put allows you to limit your loss.

So if you bought a 34$ put for 1$ per share, and the share price falls to 30$, you can sell your shares for 34$ instead of 30$, and instead of losing 500$ on the sale you lose 100$ on the sale.
So buying the Put would cut your loss by 80%.

So as an options trader, I sell Puts to those traders needing this insurance or protection from losses. And I love to sell Puts on positions I want to own. This allows me to own them at a price I choose.

For Example:
Plan A is to sell Puts on this ETF at 31$ and wait for a dip, then I will have to fulfill my obligation as a Put seller and buy at $31.

This is great for many reasons:
I get the ETF shares at a price I want.
I get to further reduce my basis by whatever premium I was paid for the Puts and lastly I am almost guaranteed to get the shares at my price if it drops, versus competing with everyone else who places a limit order.

Reduced Basis or Cost or Price

I should further explain the reduced basis. Because I sold the Put, not only do I get to buy the shares at $31, but I sold the Put for example at one dollar a share. So that 1 dollar reduces my cost of buying the shares from $31 to $30! So this means is that my cost basis is reduced by the premium paid for the Put.


I should further explain assignment. The investor who bought my puts has his shares locked up in this Put contract. He can only sell them to me. I don’t have to compete with every other limit order on the market. These shares are mine if the price drops one cent below the strike price. So my purchase is guaranteed.

I call this Put Magic.

Plan B

This plan is just like Plan A, except the Put price is higher, so the premium is higher. So for Plan B you sell a put at $33, instead of $31, and for two dollars a share instead of one dollar. Now this increases the likelihood of you being assigned because $33 is much closer to the current price of $35, than $31. But that’s OK because you want to buy the shares. Plus the higher premium of 2$ is subtracted from the strike price of 33$, so that your actual cost basis is still $31 ! And as you can imagine, Plan B is statistically more likely to happen, as the price is more likely to dip from 35 to 33 then it is to fall from 35 to 31. So that would be my plan to get into this ETF at a good price.


In this post I reviewed a 5G ETF and my strategy for entering the investment at a good price, using the Options strategy of Put Selling, which I nickname Put Magic, but is called Selling Cash Based Puts. The last thought I want to leave with you is that you could use this strategy to buy and accumulate Bitcoin or Ethereum at intraday lows if there are options on those two tokens for sale at your exchange.




Other Options Articles by @shortsegments

Link to article


Link to article

5G Article

@rollandthomas article link

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I hope they trade nano-lot for BTC :D

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Love this example, I don't really use this strategy, but it's a great one. I think supply and demand makes puts this strategy on steroids. Meaning if price is approaching a demand zone, putting on a put then will increase the returns vs. if price was further away from the demand zone.

Either way awesome strategy as it allows you to get in the trade at a discount , but once must know at what point to get out of the trade if price goes way against them.

Have you ever done any Synthetic long stock options 2020 I put on several of these trades and love them?

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,I have done so on occasion, usually following an article or write up like yours. With Options you have many options :)

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