Last week I talked to you about the importance of taking action.

I pointed you to this video from back in March where I shared 3 stocks that I believed were perfect for generating income.

As an example, I wanted show you how much money folks are leaving on the table when they don’t take action.

So I wrote this piece showing how you could have used Covered Calls with AVGO over the past few months to generate a cashflow for yourself.

Then I wrote this piece showing how you could have used Credit Spreads with the same stock over the same timeframe.

Today I wanted to show you how you could have generated income from the same stock using a third strategy: Naked Puts.

When you sell naked puts, you’re essentially selling someone the right to “put” the stock to you if it falls to a certain price by a certain date.

The money you collect is called premium. The price you promise to buy the stock at is called the strike price. And the date it has to happen by is called the expiration date.

Now that you’ve got those basics down, lets run through an example scenario to see how we could have generated a cashflow by selling naked puts on AVGO.

Round 1

As with our previous examples, we’re going to start on March 15th.

On that date, AVGO was trading around 1250 per share.

At that price, we could have sold an 1160 strike price put expiring April 19 for $19.05.

Since each contract controls 100 shares, that means we multiply the $19.05 x 100.

That means we collect a cool $1905 in exchange for promising to buy AVGO if it falls below 1160 per share by April 19.

If the stock does fall below 1160 per share before April 19, we’ll automatically be assigned the stock.

That means you have to have $116,000 cash in your account. It won’t get touched

Side note: Using margin is beyond the scope of this tutorial. But just for your information, if you are trading using margin, which is money that your broker lets you borrow, you only need 20% of that amount.

Round 2

Because AVGO didn’t fall to 1160 per share by April 19th, we keep the full $1905 premium that we collected.

Then when markets open the following Monday, we can sell another Naked Put.

With AVGO trading at 1227 per share, let’s say we decide to sell the 1120 put expiring May 31 for $18.10.

Again, we multiply that x 100, meaning we instantly collect $1810 in cash in exchange for promising to buy 100 shares of AVGO for $1120.

We’ll need $112,000 in our account, or 20% of that if we’re using margin.

Round 3

By May 31st, AVGO had only gone up, so again we keep the full $1810 premium that we collected.

On Monday, June 3, we look to sell another put.

With the stock trading at 1342, we sell a 1210 put for $22.00, instantly collecting $2200.

Over the next few weeks, AVGO soared 40%, then came down off that peak by 14%.

But none of that mattered to us, because we received our max profit the moment we entered the trade.

Closing

Between March and now, the stock price moved in a very bullish way.

Because of that, we never ended up getting assigned the stock — and we were able to just keep collecting premium without ever having to fulfill our end of the bargain.

But I don’t want to leave you with the impression that Naked Puts just lets you collect free money.

If the stock had moved down enough, we absolutely would have been assigned the stock at the strike price we sold.

And if we ended up owning the stock, then what?

That’s the biggest fear some traders have. But if you’re doing covered calls right — with a strongly trending stock — it’s nothing to worry about.

We would just turn around and start selling covered calls, which would allow us to lower our cost basis.

Remember, if you get assigned the stock, your cost basis is the strike price at which you were assigned minus the premium that you collected.

Then as soon as you sell your first covered call, that lowers your cost basis again.

Stay tuned — later this week I’m going to put all the strategies side by side to show you the pros and cons for each each.

There’s a lot of moving parts to these strategies and this is going to help you decide which one is best for your needs and goals.

Trade well,

Jack Carter

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