How to Buy Stocks, Priceline-Style
When Priceline burst onto the scene in 1998, it stood out because it offered would-be travelers a new, cheap way to book airline tickets.
By allowing users to name their own prices, Priceline turned the online-travel world upside down. Instead of scouring the web trying to find the best price, you could set your own price for a flight, cross your fingers, and hope you’d get “filled” at that price.
People loved the idea of being able to set their own price for something as expensive as a plane ticket.
But can this model work in other parts of life, like buying and selling stocks? Say a stock you love is priced at $25, but you want to buy it at $20. Wouldn’t it be great if you could put in an order at $20 and have it filled if the price dipped down to that level?
That’s possible — it’s called a limit order, and it basically says “buy this stock if/when it hits $20.” But if it takes months or years for the stock to come down, you’re wasting valuable time. Plus it’s boring.
Options allow you to make the same trade with one exception: You can make money each month that the stock doesn’t hit your price. You’ll still have to wait for the price to come down, but you’ll get paid while you wait.
It’s like Priceline sending you a check for $30 every month that they can’t find you a flight to LA at your $500 price.
The downside, of course, is that you never know when you’ll get to go to LA. You might never go because the price may not fall that low, but at least you’ll get paid to wait.
That’s how the "cash-secured put" strategy works — you name your own price, and you get paid while you wait. There are a bunch of other options strategies out there, but this one is a personal favorite.
For investors looking to buy a stock at a specific (lower) price, the cash-secured put is a popular way to use one of the advantages of options to make a stock trade.
If you want to test out a cash-secured put or any other options strategy, a great way to go about it, especially for beginners, it is to try it in a virtual trading account. Online brokers like OptionsHouse* offer virtual trading free of charge. In a virtual account, you are able to try trading with real stocks and prices, but with virtual dollars. Once you’ve learned the ropes and gained the confidence, you can try the cash-secured put for real.
One thing to remember: The “cash-secured” part implies that you’ve got the money available to buy the stock at the discount price you want. If you are waiting for that stock to hit $20, and you’d like to buy 100 shares, you’d need to set aside $2,000 for if/when the stock hits your target price.
If you do wind up owning the stock, you’ll take on the same risks as owning any other stock — gains are unlimited if the shares rally, but the stock can also go down to zero.
Think of the cash-secured put as the “Priceline of options strategies,” without the William Shatner endorsement.
* Disclaimer: I am an employee of OptionsHouse and do not have a position in or endorse Priceline as a company or a stock. The views and opinions expressed on this post are mine and do not necessarily reflect the views of OptionsHouse, LLC or any of its affiliated companies. Check out more cash-secured put examples on the OptionsHouse blog.