Lowering Your Cost Basis.

Or another way to say it, reducing the amount of your original investment to minimize your risk.

Spending a large amount of cash on an investment or stock trade could be daunting to newbies. This will detail ways to reduce your original cost so if you get your ass handed to you it won’t hurt your wallet too much.

Let’s use pffft I don’t know, AT&T for the example. Today it’s trading at $31.75 a share but could change in the speed of a tweet. It has an attractive 7.04% dividend yield which equates to a payout of $0.50 a share. This chunk of change is paid out four times a year equalling $2.00 a year for every one share.

We don’t want to settle for $2.00 a year so we drop enough cash for a 100X payout or $200.00 annually. Pump the brakes for a moment, how much is this fun going to cost?

100 shares of AT&T today would cost you $3,175. At a rate of $200 per year this investment would take 15.875 years to pay for itself. This isn’t ideal for impatient people so I’ll cover another option, no pun intended.

I’ve discovered options trading recently and have fallen for this style of trading. An option try and put it plainly is one person paying a premium to purchase 100 shares of a stock at a certain price by a specified date. Or if you already own the stock, you can collect a premium every week or whatever your desired timeframe for providing the option to sell 100 of your shares should they meet a certain price.

An example of this for AT&T would be an option to sell +1 option (100 shares) at the price of $32 a share on or before May 31st for a premium of $0.30 a share. Since it would be 100 shares the premium would be multiplied by 100 to $30.00.

This is my favorite part. Say the stock doesn’t get to $32 a share by the expiration date. What then? The person (you) who hold the shares would collect the $30 and keep your 100 shares. The other person (sucker) who paid for the option to buy those shares loses their $30 and receive no shares. As you can see the closer the price is to the strike or bet upon price the higher the premium you’d receive.

Now in theory, if you can determine what price the stock wouldn’t break by a certain date you can sell options on a bi weekly basis and therefore lower your cost quicker. With just the options averaging $30 per contract it would make you $780.00 per year. This would have the original investment of $3,175.00 paid off in 4.07 years.

If the stocks don’t sell and you continue making a profit all while earning dividends then the total income from just owning AT&T would be $980.00 per year. Provided you don’t reinvest the profits for additional shares. (I suggest buying free shares to increase your amount to 200. Yanno double the fun.) This method would have your original cost of $3,175.00 paid off in 3.23 years!

But what if the price does go above the amount in the option??? Even better. You still collect the premium and sell at a price higher than you purchase the original shares for. Keep a close eye on the market and buy the shares back at a lower price like $30.00 a share and start the cost basis game all over again. 😎

With this method it matters less about what the stock price is doing and more about the amount of shares you own. Good luck out there and don’t forget to follow us on faceboook! We post memes and shit.

Do your own due diligence. Not responsible for gains or losses.

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