No, that's not a typo. For those of you looking to dip your toes into financial stocks at these levels, one strategy to consider is selling puts in order to get long the stock. Not only does this reduce your cost basis, it is also a good strategy for those of you trading within your retirement vehicles (IRA's, 401K's, 403b's, etc...). One key element to trading in this fashion that you must remember and adhere to is that you must want to own the stock in order for this strategy to be successful. This means that you should only implement this strategy in stocks that you want to own for a longer period of time. So why sell puts instead of just buying the stock outright? First of all, selling puts, as mentioned above, reduces your cost basis. Let's take a look at a recent example involving Citigroup, symbol C. As of the close of trading on July 28, 2008, the stock was trading $17.28. Let's say we wanted to purchase 1000 shares of C. There are two ways to transact this purchase. You could either purchase the shares here and pay $17.28 per share for a total debit of $17,280.00, or purchase the shares at a lower price by selling out-of-the-money puts on the stock. In the latter case, thinkorswim recommends selling premium 40-150 days out. So in our example, we would be looking to sell puts in September or October.

Currently, the September 15 puts are trading for $0.95. By selling 10 of the Sep 15 puts, the equivalent of 1000 C shares, we collect $950.00 premium from the sale in our account. In addition, we are now obligated to buy the 1000 shares of C at $15.00 if the underlying stock settles below the 15 strike at September expiration. However, if this is the case and the stock settles below $15 at expiration, we still keep our $950.00 premium from the sale of 10 puts and will be assigned the stock. Figuring out our stock basis is simple. You just take the strike price and subtract the credit you collected. Thus, our new cost basis for buying the Citigroup stock that we wanted to own becomes $14.05, or a debit of $14,050.00 for 1000 shares.

If, however, the stock never trades or settles below $15 at expiration, we simply keep our $950.00 credit, roll the same put sale into October, and so forth. Thus, we are buying by selling. As always, happy trading and stay profitable.

thinkorswim, Inc. and its registered employee, Joe Mazzola, do not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.