The key takeaway you should have is that when you sell a cash-secured put, it’s a lot like setting a limit order to buy a stock. A big difference however is that you get paid to sell a cash-secured put. You get nothing for setting a limit order.

To make the point clear for you, here are some examples for stocks that are on the Very Short List (of companies that can lead in the next decade) at my investment letters. I’ll work through this example in full and you can apply to the stocks on the chart below.

CenturyLink (CTL): If you have been reading me, then you know that I like CenturyLink’s future due to the expansion of communications in the “smart everything world” that is developing.

Right now, the stock is trading at about $18.32 and the 200-day moving average is at $17.76. Interestingly, the 50dma is just making a “golden cross” above the 200dma, making it a pretty attractive stock technically.

I already own some stock, but if I could buy it a bit lower than today’s price, I’d be inclined to buy more. I could set a limit order at the 200dma of $17.76, which is normally a pretty good price to buy at when a stock is starting to move up (or in an established uptrend). My other choice would be to sell a cash-secured put that generates income and gets me an even lower cost basis on a new batch of CenturyLink stock.

In this case, I can sell the CTL July 2018 $18 put for about 80¢. What does that mean?

Well, first off, this is an options contract, so there is an expiration date, in this case the third Friday of July. Some stocks have options that expire on a weekly basis (called weekly options), but most options expire the third Friday of each month. So, the CTL July 2018 $18 put expires on Friday, July 20th.

Between now and the expiration date, if the price of the stock is under $18, the person who bought the put from me, can make me buy their CenturyLink stock for $18 (the strike price). I am cool with that idea. I’m especially cool with it because, remember, they already paid me an 80¢ premium, meaning my net cost on those new CenturyLink shares would be $17.20, which is far below today’s $18.30 and even the possible limit order I would have put in at $17.76.

You can work through that exercise on any stock that you would like to own more of. The very cool thing about selling cash-secured puts is that it becomes recurring revenue. Why? In my experience, by using the 200dma as your target area for setting strike prices on stocks that are in a neutral or positive price trend (this is important, we don’t want to try to catch falling knives, more on this later), about 3/4 of options simply expire without assigning you any stock.

 Related: This Options Trade Can Hedge Your Bets in a Risky Market.