How to Systematically Buy Stocks for Less Using Options

The Mandate to Acquire Assets at a Discount

The primary method for acquiring stock at a price below its current market value is through the strategic selling of put options. This financial instrument gives the buyer the right, but not the obligation, to sell a specific stock at a predetermined price within a specified time. When you sell a put option, you are taking the other side of this transaction. You collect a premium upfront, and in exchange, you accept the obligation to buy the stock at the specified price (the strike price) if the option is exercised.

This approach is fundamentally a tool for systematically entering a stock position at a calculated discount. The premium you receive effectively lowers your purchase price if the stock is assigned to you. It is a proactive method for dictating the terms of your entry into a long-term stock holding.

A cash-secured put involves setting aside the capital to purchase the underlying stock, with the premium received from selling the put option acting as an immediate yield on that cash.

A core concept in this process is the “cash-secured put.” This means you have the necessary funds to buy the stock if the put option you sold is exercised. The premium collected from selling the put provides an immediate return on your capital. If the stock’s price remains above the strike price at expiration, the option expires worthless, and you keep the premium, having generated income on your cash.

Should the stock’s price fall below the strike price, you are obligated to buy the shares at that strike price, but your effective purchase price is the strike price minus the premium you already received. This creates a more favorable cost basis than if you had purchased the stock at the market price when you initiated the position.

A Framework for Systematically Acquiring Stocks

Deploying options to acquire stocks at a discount requires a structured approach. It begins with identifying stocks you want to own for the long term. This strategy is not for speculative short-term trades but for building a portfolio of quality companies at advantageous prices.

The process involves analyzing both the fundamental value of the stock and the technical levels that might represent good entry points. Once you have a target stock and a desired purchase price, you can use put options to execute your plan.

Identifying Suitable Stocks and Strike Prices

The selection of the underlying stock is the most critical step. You should only sell puts on companies you are comfortable owning. The goal is to be assigned the stock. After selecting a stock, the next decision is choosing a strike price.

A strike price that is “out-of-the-money” (below the current stock price) is generally preferred as it provides a buffer against a price decline. The further out-of-the-money the strike price, the lower the premium you will receive, but the greater the discount you will achieve if the stock is assigned. The expiration date also plays a role. Shorter-dated options will have lower premiums but can be sold more frequently, while longer-dated options offer higher premiums but less flexibility.

The Wheel Strategy

A popular method that incorporates selling puts to acquire stock is known as “The Wheel Strategy.” This is a cyclical process that involves two main phases:

1. Selling Cash-Secured Puts ▴ You repeatedly sell cash-secured puts on a stock you want to own until you are assigned the shares. Each time an option expires worthless, you keep the premium and can sell another put.
2. Selling Covered Calls ▴ Once you are assigned the stock, you begin selling covered calls against your new holding. A covered call is an options strategy where you sell call options against a stock you own. This generates additional income from the stock. If the stock price rises above the call’s strike price, your shares will be “called away,” meaning you sell them at that price. You can then take the proceeds and return to step one, selling puts to re-acquire the stock or to enter a new position in a different company.

A Practical Example of Acquiring Stock at a Discount

Let’s consider a hypothetical scenario where you want to buy shares of a company currently trading at $105 per share. You believe that $100 is a good entry point for a long-term investment. Instead of placing a limit order to buy at $100, you decide to sell a cash-secured put option with a strike price of $100 that expires in 30 days. For selling this put, you receive a premium of $2 per share, or $200 for one contract (which represents 100 shares).

• Scenario 1 ▴ The stock price stays above $100. The put option expires worthless. You keep the $200 premium and have generated a return on your cash without buying the stock. You can repeat the process by selling another put.
• Scenario 2 ▴ The stock price drops to $98. The put option is exercised, and you are obligated to buy 100 shares at the $100 strike price. Your total cost is $10,000, but because you received a $200 premium, your effective purchase price is $98 per share ($100 strike price – $2 premium). You have successfully acquired the stock at your desired price, which is also the current market price, but with the added benefit of the premium reducing your cost basis.
• Scenario 3 ▴ The stock price drops to $95. The put option is exercised, and you buy the shares at $100. Your effective cost is $98 per share. Although the stock is trading at $95, your entry point is still lower than if you had bought the stock at $105 initially.

Advanced Strategies for Enhanced Stock Acquisition

Mastering the use of options to acquire stocks opens the door to more sophisticated techniques. These advanced applications are designed to further refine your entry points, manage risk more effectively, and enhance the overall returns of your portfolio. By moving beyond single-leg put selling, you can adapt to a wider range of market conditions and express more nuanced views on a stock’s future price action. These methods require a deeper understanding of options pricing and risk, but they can provide a significant edge in building your portfolio.

Using Put Spreads to Define Risk and Lower Capital Outlay

While selling cash-secured puts is an effective strategy, it does require a substantial amount of capital to be held in reserve. A way to reduce this capital requirement is by using a put spread. A bull put spread involves selling a put option at a certain strike price and simultaneously buying a put option with a lower strike price. The premium received from the sold put is partially offset by the cost of the purchased put, resulting in a net credit.

This strategy has a defined maximum profit (the net credit received) and a defined maximum loss (the difference between the strike prices minus the net credit). A bull put spread can be used to generate income from a moderately bullish to neutral outlook on a stock, with less capital at risk compared to a cash-secured put.

Leveraging Deep In-The-Money Calls for Capital Efficiency

Another advanced technique for acquiring a stock-like position at a lower cost is to purchase deep in-the-money (ITM) call options. An ITM call option has a strike price that is significantly below the current market price of the stock. These options have a high delta, meaning their price moves very closely with the price of the underlying stock. By purchasing a deep ITM call, you can control a large number of shares for a fraction of the cost of buying them outright.

This can be a capital-efficient way to gain long exposure to a stock, with the potential for amplified returns. However, it is important to understand that this strategy also comes with the risk of losing the entire premium paid for the option if the stock price declines.

The Transition to Proactive Portfolio Construction

The journey from a passive investor to a proactive portfolio architect begins with the realization that every tool has its purpose. Options are not merely instruments of speculation; they are precise tools for shaping the contours of your financial future. By learning to systematically acquire assets at a discount, you are no longer a price-taker but a price-maker.

You are setting the terms of your engagement with the market, transforming your investment process from one of reaction to one of intention. This is the foundation of a more sophisticated and empowered approach to building wealth.