Having Problems Buying? Consider Selling Puts.

We are in very volatile times.  Folks who try to build their own portfolios may be second guessing themselves when it comes to adding to positions or building new positions.  With this uncertainty comes hesitation.  Should I buy the homebuilders, financials, quality blue chip stocks, volatile tech stocks, beaten down growth or value stocks today?  The right answer will present itself after you've hesitated and you end up chasing performance.

You may have noticed recently that I've been selling some puts.  I currently have some open short put positions in what I consider to be quality stocks and I'm searching for new items to sell puts against at least once a week.  Why am I doing this?  The simple answer is to buy long term holdings on what I feel at the time are "good" prices.  For example, I have a short put on GE @ 30.00.  I felt at the time that I sold this put that getting GE @ 30 - premium taken in would be a good buy.  It's easy to second guess yourself when the market gyrates like it has been.  Often times, if you look at a long term chart after hours, when the madness has died down, you can usually make a comfortable decision about where you'd like to own a stock.

I think this can help the psychological aspect if a stock plummets, takes off or sits still.  Why?  If a stock plummets and your short put is assigned, you own stock with a company you feel good about at a price you feel good about.  This doesn't mean it's the bottom of the stock.  Maybe you can sell some covered calls to generate some income if the stock is still correcting.  If the stock sits in a range, you've collected premium which is quite when a stock does nothing but you make a profit.  Finally, if the stock takes off and you're not assigned, you may feel that you haven't completely missed the boat.  After all, you did make the premium.  This may be relatively small compared to owning the stock, but you didn't completely miss out.  Plus you have the option of selling additional puts in hopes of catching the next "correction".

Let me be very clear here.  Sellings puts is not for everyone.  Theoretically, your reward is limited to the premium collected and your downside risk is if the stock moves to zero.  I'm not recommding that anyone sell puts today, I'm simply recommending that you add this "tool" to your portfolio building strategy.  It may be particularly helpful if you're having problems pulling the trigger.  Let me also mention that your risk is also the same if you own the stock outright.  Any stock can go to 0.

If the risk aspect bothers you, you can always consider a vertical spread where you sell the higher strike and buy a lower strike which caps your risk and lowers your reward.  It all depends on your outlook and risk tolerance.  If you've never sold a put before, I highly recommend that you do a vertical spread to cap your risk but understand how this position behaves.