The Definitive Guide to Buying Stocks with a Discount

Commanding Your Entry Price

The disciplined investor recognizes that the price paid for an asset is the primary determinant of its future return. A common practice involves accepting the price displayed on a screen. A superior approach exists, one that grants you influence over your acquisition cost. This method transforms the act of buying from a passive acceptance of terms to an active declaration of intent.

You can define the price at which you are willing to own a piece of a business. This is achieved through a set of tools designed for precision and strategic entry. The foundational instrument for this purpose is the put option, specifically the act of selling one that is secured by cash.

Understanding this mechanism begins with the put option itself. An option is a contract that conveys rights and obligations related to an underlying asset, such as a stock. When you sell a put option, you are entering into a binding agreement. You grant the buyer of that option the right to sell you 100 shares of a specific stock at a predetermined price, known as the strike price, on or before a set expiration date.

For taking on this obligation, you receive an immediate payment. This payment, the option premium, is yours to keep regardless of the outcome of the trade. The ‘cash-secured’ component of this transaction is your professional commitment. It means you hold sufficient capital in your account to purchase the 100 shares at the strike price if the option is exercised by the buyer.

A cash-secured put is an options trading strategy where the investor sells a put option contract while simultaneously setting aside enough cash to cover the potential purchase of the underlying asset at the strike price.

This entire process can be viewed as setting a limit order below the current market price, with the added benefit of being paid to wait. If the stock’s price remains above your chosen strike price, the option contract expires worthless. You retain the premium as pure income, having risked no capital on the stock itself. Should the stock’s price fall below your strike price, the buyer will likely exercise their right.

You are then obligated to purchase the shares at that strike price. Your effective purchase price, however, is the strike price reduced by the premium you already collected. You acquire the asset you desired from the outset, and you do so at a calculated discount to the price it was when you initiated the position. This is the first step in shifting your mindset from price-taker to price-maker.

The Operator’s Handbook for Acquisition

Deploying the cash-secured put strategy requires a systematic approach. This is an income-generating tool and a method for strategic acquisition. The protocol begins with identifying suitable candidates and proceeds through precise execution and disciplined management. Every step is a deliberate action designed to produce a specific outcome ▴ generating income or acquiring a quality asset at a predetermined advantageous price.

Targeting the Right Candidate

The selection process is the most critical phase. Your focus rests on businesses you genuinely wish to own for a significant duration. This strategy is exclusively for high-conviction ideas. The primary question you must affirm is, “Would I be pleased to own 100 shares of this company at the strike price, even if the market price continues to fall?” A positive answer is the only acceptable prerequisite.

The underlying company should exhibit strong fundamentals, a durable competitive position, and competent management. This is an investing strategy, with trading mechanics as the vehicle for entry. The objective is to be assigned the shares. The premium income is a secondary, albeit highly attractive, benefit of the process.

The Mechanics of the Trade

Once you have identified a target company, the next phase involves the technical parameters of the trade itself. Your decisions here will directly influence the premium received, the probability of acquiring the stock, and your effective discount. Two main levers are at your disposal ▴ the strike price and the expiration date.

Strike Price Selection

The strike price is the price per share at which you agree to buy the stock. Choosing a strike price involves a direct trade-off between income and probability.

A strike price closer to the current stock price (at-the-money) will command a higher premium. This increases your immediate income and the statistical likelihood of the option being exercised. You are agreeing to buy the stock at a price that is only slightly lower than its current trading level. A strike price further below the current stock price (out-of-the-money) will generate a lower premium.

This reduces your immediate income but also lowers the probability of assignment. You are setting a more ambitious discount for your potential purchase. Your selection should align with your primary goal. If acquiring the stock is the main objective, a closer strike price is logical. If generating income is the priority, a more distant strike price provides a wider buffer.

Expiration and Time Value

The expiration date determines the length of your obligation. Options are decaying assets; their value, known as time value or theta, diminishes each day. This decay accelerates as the expiration date approaches.

As the seller of the option, time decay works in your favor. Each passing day reduces the value of the option you sold, bringing you closer to realizing your full profit from the premium.

Shorter-dated options, such as those expiring in 30 to 45 days, offer a potent balance. They provide meaningful premium due to their remaining time value while allowing you to compound returns more frequently by initiating new positions monthly. Longer-dated options will offer higher upfront premiums in absolute terms.

They also commit your capital for a longer period and react more slowly to the decay of time. A common operational tempo involves selling puts with about one month until expiration to consistently harvest premium while regularly reassessing the underlying asset.

Calculating Your Effective Discount

The power of this strategy becomes tangible when you compute your new cost basis. The calculation is straightforward yet profound. It quantifies the monetary advantage you gain by using this professional method. The formula is a declaration of your engineered discount.

Your effective purchase price is the strike price of the put option you sold, minus the per-share premium you received for selling it.

Effective Cost Basis = Strike Price ▴ Premium Received Per Share

Consider a stock you wish to own, currently trading at $105 per share. You identify it as a quality company and decide you would be a confident buyer at $100 per share. You proceed to sell one put option contract with a $100 strike price that expires in 30 days. For this, you receive a premium of $2.50 per share, which totals $250 for the single contract (representing 100 shares).

• Scenario 1 ▴ Stock Price Stays Above $100. The option expires worthless. You keep the $250 premium. You did not acquire the stock, but you generated a return on your secured capital. You can repeat the process, potentially at a different strike price or for a different expiration, continuing to generate income.
• Scenario 2 ▴ Stock Price Falls Below $100. The option is exercised. You fulfill your obligation and purchase 100 shares of the stock at the agreed-upon $100 strike price. Your total outlay is $10,000. Your effective cost basis is not $100 per share. It is $97.50 per share ($100 strike – $2.50 premium). You have acquired the target asset at a 7.1% discount to its price when you initiated the trade.

Position Management Protocol

The trade does not conclude upon initiation. Active management ensures you are responding to market movements in a way that aligns with your strategic intent. Three primary paths can unfold.

If the stock price rises, moving further away from your strike price, the value of the put option you sold will decrease. You can choose to simply let it expire worthless, securing the full premium. Alternatively, you can “buy to close” the position early. This involves buying back the same option contract, which will now be cheaper, to lock in a majority of the profit and free up your capital to deploy on a new opportunity.

If the stock price moves sideways, hovering near your strike price, the passage of time will erode the option’s value. This is the ideal scenario for pure income generation. You can wait for expiration or close the position early for a profit.

If the stock price falls below your strike price, assignment becomes likely. This is the outcome you prepared for when selecting the candidate company. You will purchase the shares at your chosen strike price, establishing a long-term position at a discounted cost basis.

From here, a new set of strategies, such as selling covered calls against your newly acquired shares, becomes available. This is the foundation of the “Wheel Strategy,” a continuous cycle of selling puts to acquire shares and selling calls to generate income from them.

The Professional’s Edge in Liquidity

Mastering the acquisition of shares at a discount extends beyond individual options trades. For substantial allocations, professional investors and institutions operate on a different scale. Their challenge involves acquiring large blocks of stock without adversely affecting the market price. Executing a large buy order directly on an exchange can signal demand to the market, causing the price to move higher before the order is fully filled.

This phenomenon, known as market impact or slippage, directly erodes returns. The professional toolkit contains a mechanism specifically designed to source deep liquidity with precision and discretion.

Sourcing Liquidity with Precision

The instrument for this task is the Request for Quote, or RFQ. An RFQ is a formal, electronic inquiry sent to a group of liquidity providers, typically large market makers or investment banks, to solicit competitive bids or offers for a specific security. Instead of broadcasting a large order to the entire market, an investor can use an RFQ to privately ask, “What is your best price for X thousand shares of this stock?” This process transforms the search for liquidity from a public spectacle into a private negotiation. The entire interaction is conducted anonymously through a trading venue, ensuring the initiator’s identity and intentions remain confidential.

A Globex Request for Quote (RFQ) is an electronic notification sent to all Globex participants to solicit quotes in the central limit order book (CLOB) for a specific strategy or instrument.

This method is standard practice in markets for less liquid instruments like bonds or derivatives, but its application in equities provides a distinct advantage for executing large trades. It allows a portfolio manager to access liquidity that is not visible on the public order book. Market makers are often willing to commit capital and facilitate large trades at a single price point, a service they provide in response to these direct inquiries. The result is a single, large transaction executed at a known price, a far superior outcome to chasing a price higher across multiple smaller fills.

Integrating Advanced Acquisition Tools

The use of RFQs represents a higher level of operational sophistication. A portfolio manager looking to establish a significant position in a company can use this system to achieve a better average price than would otherwise be possible. The process is systematic. First, the manager defines the size of the desired block.

Second, an RFQ is submitted to a select group of liquidity providers through a trading facility. Third, the manager receives multiple, competing quotes in real-time. Finally, the manager can execute the trade by selecting the most favorable quote. This competitive dynamic among providers ensures the final execution price is fair and reflects the true market level for that size.

This professional methodology shares its core principle with the cash-secured put. Both are deliberate systems designed to achieve a superior entry price. While the cash-secured put uses the options market to define a discount for a retail-sized position, the RFQ uses a private auction to minimize the cost of a block-sized position. A truly advanced strategist can synthesize these approaches.

An institution might acquire a core position via an RFQ and then use cash-secured puts to incrementally add to that position on price dips, generating income while waiting for opportunistic entry points. This integration of institutional and sophisticated retail techniques marks a comprehensive command of asset acquisition.

The Mandate for Active Acquisition

You now possess the frameworks used by disciplined operators to acquire assets on their own terms. The market presents a constant stream of prices. The majority of participants accept them without question. You are now equipped to interrogate those prices, to propose your own, and to be compensated for your patience.

This knowledge is the dividing line between passive ownership and active accumulation. It is a fundamental shift in perspective, viewing market mechanics not as barriers, but as a system of opportunities. The path forward is one of deliberate action, strategic patience, and the quiet confidence that comes from controlling the most important variable in any investment ▴ the price you pay.