If you were lucky enough to buy stocks back in March or April, you are probably feeling pretty good about yourself. But there are many investors who have been sitting on the sidelines, waiting for a market dip in order to buy back in; it's been a painful wait.
Forget Market Timing
It may be even more important to worry about pricing stocks, and not timing the market - find a stock that looks like a great bargain and excellent long-term value for the money, and invest.
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Now you have a market that is up over 60% from the March lows, and the temptation not to miss out on any further upside may be creeping in your mind. My advice is still the same: invest your money where you feel you can get the most out of it.
One way to participate in the markets today is to sell put options on companies that you would love to own. This can not be stressed enough. You should only sell put options if you are 100% comfortable owning the stock. If that's the case, then selling puts can lower your cost basis.
When you sell a put, you are making an obligation to buy a stock at pre-determined price, the put strike price. (To get some background on Puts, read An Introduction To Put Writing.)
Putting Into Practice
For example, in the long run, fertilizer share prices of the best companies are very attractive. But it appears that 2009 will be a cooler for the companies. Fertilizer giant Potash (NYSE:POT) has again announced that earnings will be below revised guidance, as farmers continue to defer fertilizer application.
Potash shares now fetch $94. At the time of writing, you could sell the December 2009 $85 put contract for about $4.20 per contract. By doing so, you agree that at the December expiration date, you will buy the shares for $85 if you are asked to do so. If shares of Potash are at $85 or lower on that date, you will be required to buy 100 shares of POT for every contract you own. But you will keep the $4.20 option premium, so your net cost is $80.80 (ignore commissions for simplicity, but do consider them). So instead of paying $93 today, you can potentially own the stock for less in December.
Of course, if its shares are at $70 in December, you still must buy them at $85, and until shares reach $80.80 again, you're sitting on a paper loss. Of course this is better than buying in at $93. On the other hand, if POT shares are trading much higher in December, you've missed out on the ride, but you've pocked some premium, as the puts will expire worthless. (For more on this subject, check out Introduction To Put Writing.)
Other great candidates for put selling would include Mosaic (NYSE:MOS), another excellent fertilizer company. Steel giant Nucor (NYSE:NUE), one of the best steel companies in the U.S., has experienced a share price surge in recent months on account of China's appetite for steel again. Construction equipment maker Terex (NYSE:TEX) is an excellent company that will have a rough time of it now, but will again experience high demand for its products once the business cycle turns.
The Bottom Line
Again, only consider selling puts on businesses that you would love to own and appear to be selling at attractive prices today. (For further reading, check out the Options Basics Tutorial and When does one sel a put, and when does one sell a call?)
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