Ever hear of picking up nickels in front of a steam roller? Investing parlance uses this metaphor for a strategy I have been using for several months - and it is usually as dangerous as it sounds (significant risk for a mediocre return). Option markets allow investors to buy (or sell) the right to buy (or sell) shares of an underlying equity security (stock of a company).
A Call (right to buy) grants the owner the ability to buy stock at a given price any time before a designated date (the Strike Date). Owning a call option is similar to buying an equity stake in a company, but the price an option is more volatile than the underlying shares and requires less capital while allowing the owner to control a larger stake in the business.
A Put (the right to sell) is basically an insurance policy against a fall in the price of the underlying company. By granting the owner the right to sell at its strike price, a put allows the owner to sell at a price that may be higher than the market price.
Using puts with a strike price that is less than the market price, I earn a premium (the cost of the buyer’s insurance) by agreeing to buy if the market price falls. Because I’d rather buy an ownership at a price below market, selling put options earns income while I wait for a better price of a company I want to buy. When markets reacted to the pandemic earlier this year, many of my put options were exercised and took ownership in several companies like Square and ResMed.
Because I only sell puts for companies I want to buy, the steamroller in my case is a discounted cost basis for a company I admire.