Buying Stocks At A Good To Great Discount: Selling Cash-Secured Puts

Whenever you have an opportunity to buy something at a discount, probably most of the time you'll get exited unless you find it garbage. Let's consider AB InBev, the world's largest brewer. The stock has posted a poor performance over the past 5 years, but I just wanted to show you how you can get the stock at a discount compared to current market value (this is not a buy recommendation).

Let's say you find AB InBev a great buy right now and you don't mind paying today's full price. If you're still bullish on the stock for the next 52 days, you could sell the ATM put for €73 and get €2.56 per share in cash premium. That means that as long as AB InBev's share price expires below €73, your actual cost basis will be €70.44. If AB InBev closes above €73 on December 20, the shares aren't going to be put to you but you still keep the cash premium. Stated differently, if you choose AB InBev as underlying for put selling, you make money as long as AB InBev remains above your breakeven and if it goes up to €75.56, you still beat the ordinary shareholder without owning the shares directly...

And as you can see from the table provided above, even if you want to purchase the stock at a theoretical €74, your actual breakeven level is €70.88 or €1.94 lower than current market value. As long as AB InBev remains below €74, you'll get the 100 shares you wanted.

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