I woke up this morning thinking about an idea on investing I have been playing with and look to test in the coming weeks. The basic idea is I don’t have enough money to do what I want so I should do what I want anyway. It comes to me from the fact that I identified a Microsoft LEAP with a $500 stock price as highly attractive. It just happened to be $1500 and I was short around $500 at the time. So I did nothing instead.
Now imagine. Imagine I had gone up that option chain and bought what I could while Microsoft was still floating around $380. Right now would be pretty good, but that isn’t the end of the idea. The idea is do what you want anyway even if it’s to a lesser degree and then convert it to what you actually want.
I get Facebook ads for this book on something called the money press method. I have no idea what it is. I can’t tell you. I’ve never looked at the ads that deeply. But it did give me an idea of what to call this method. The extrinsic value extraction method. That’s the method. Take a stock you can’t afford right now but wouldn’t mind owning. Look at long dated options and do not be afraid of lottery tickets. Even a lottery ticket with a .10 Delta gives increased access for the price. It gives no ownership but it behaves like 10 shares.
Now whenever you make your monthly or weekly contribution use that to press the option contract down. Roll it down to increase access and meanwhile the hope would be the stock is rising to meet your contribution. Slowly, over the 18 months or multitude of weeks you own the contract you will be able to press all the extrinsic value out of it. Some options traders might want to throw me out a window for saying that, but this is about eventual ownership and not simply trading the contract.
Also don’t worry about the stock going down. That just means that your weekly contribution will buy more access that week. The main goal of this is the more effective use of money and shortening the time horizon for ownership. Eventually all the extrinsic value will be pressed clean out of this contract and it can be traded in, the value collected, and the underlying stock purchased.
It is a weird idea and someone might say why not just buy the stock. That is an idea, but let’s say $500 will be a .10 Delta contract but would only buy 1.5 shares. What is better 10 shares or 1.5? And this isn’t a method for violent, speculative stocks. It is best for positions you ultimately want to hold for a long time. Like Microsoft, Apple, Amazon, Google, or even more boring like Proctor and Gamble, Coke, or Johnson and Johnson. In theory your fixed contributions and the stocks rise should over an 18 month period be able to wring all the extrinsic value out of the contract and if it hits a desirable return before then then all the better.
David Huzzard Writes 