Invest in the bear market by Selling Put Options which you want to own anyway
Investing in a bear market can be a daunting task, as the market is characterized by declining stock prices, pessimism, and fear. However, I see it as a great opportunity for me to buy stocks at a discounted price and reap significant gains by focusing on my long term goals.
I will share my thought process here on how I can buy the stock I want buy writing put options.
WHAT is put option selling?
Firstly, we need to understand that selling a put option allows an me to potentially own the underlying stocks at a future date and a price below the current market price.
WHY I choose $ASML Holding NV(ASML)$ for put options writing?
I worked in the semiconductor industry previously in the photolithography department that uses machines built by ASML and understand how they hold a true monopoly to the latest photolithography technology. If you let me choose a stock I want to hold till retirement, this will probably be the stock. It also pays a dividend of around 1% which can help to offset (American Depositary Receipt (ADR) holding fees.
EXAMPLE of Selling Put Option with ASML
Based on the daily chart of ASML, one of the key support level of ASML should be around US$S400. However, the current price is around US$500-600 region, which I think is kind of too high for my appetite to buy the stocks directly.
Instead, I will sell one January 2024 $400 put option expiring 11 years from now for around $13.$ASML 20240119 400.0 PUT$ $ASML 20240119 400.0 PUT$ .This option will expire on the 19 January next year and has an exercise price of $400. One option contract covers 100 shares, allowing me to collect almost $1,300 in options premium up front (less commission).
By selling this option, I am agreeing to buy 100 shares of ASML for US$400 no later than January next year. Obviously since Company A shares are trading for $624.21 today, the buyer of my put option isn’t going to sell me the shares for $400. So I can collect the premium and while I wait.
In the scenario that ASML drops to below US$ 400, take for example US$390 before expiry in January next year, I am will be required to buy the 100 shares at that price when the option buyer exercise the option at expiry date or I will have to incur some losses by buying back the option I have sold at a higher price. Let’s say I went ahead of to buy the share at $400, l will still keep the premium of $13 per share, so my cost will be $387 per share. If ASML never fall to $400, the option will expire worthless and l will keep my initial premium of $1,300.
What to take note
It is important to note that I have to keep US$40,000 as a in my account period to buy this near to the expiry and maintain a certain margin with my broker.
However, if a black swan event ever happens, ASML goes bust and stock price drops to U$1.00, the buyer of my put option will exercise the option and sell the shares at the strike price of US$400 to me. Then I will be forced to buy these worthless shares at $400 each and lose about US$40,000.
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