Will Rogers, the great American humorist, when asked to explain his views on the stock market answered; “you buy a stock because it is going up. If it doesn’t go up, don’t buy it.”

Simplicity with a hint of fact. When we think about stocks, we think about growth. We buy them because, over the long term, we expect to sell them at a higher price. The problem for most investors is knowing when to enter and when to exit. Often buying at the wrong time, ending up with a stock that falls sharply, sometimes well below their entry point. Or selling just before the company takes off.

A better way, I think, is one in which we spend less time trying to time entry and exit points, and spend more time trying to establish entry and exit points. In the end, we want to end up with a basket of good quality stocks at reasonable prices, or at the very least, a profitable shorter-term trade within a broader portfolio.

One approach is to write puts on a stock you want to own. For example, say you want to acquire shares of Suncor Energy (symbol SU, recent price $90.50), but in your mind, the price is too high. If that were your view, then you could write a Suncor December 90 put at $5.50. The sale of the December 90 put obligates you to buy the shares at $90 per share until December.

Having received $5.50 per share in premium income, your “net cost” should you actually buy the stock is $84.50 ($90 less $5.50 = $84.50). What’s important is that you believe the “net cost” (before transaction costs) for the Suncor shares is a price you are comfortable with.

One of the problems with this strategy is the downside risk. You may end up owning the stock below the current market price, but you are still buying shares, and your maximum downside risk is still zero.

Of course buying into a good quality stock that ends at zero is unlikely. But even good quality stocks can get hit with bouts of extreme volatility, which can be unnerving.

Telus is an excellent recent case study. Telus peaked at $66 per share as the market bet that Telus would be the winning bidder in the BCE stakes. When Telus backed out of the deal, the stock fell to $52 per share, and at the time of writing, has since recovered to $54.80.

If you liked Telus at the peak, but thought the price was too high and the risk was even higher, then you could have sued another approach that follows the precise entry and exit point theme. In which case, I would have you look at put spreads.

The goal is to take on an obligation to buy a stock that you want to own, but with the spread, you limit your risk on the downside.

For example, when Telus was at its peak ($66 per share), let’s assume you sold a November 66 put at $6.00 and purchased a November 60 put at $3.50. Your net credit for this trade would have been $2.50, your maximum risk $3.50 per share. The maximum risk, which is the difference in the strike price of the puts less the net credit received, occurs if Telus is trading below $60 per share in November.

Now fast forward to today. Telus is at $54.80 per share, the November 66 puts are trading at $11.50 per share while the Telus November 60 puts are trading at $6.25. If you closed out this position your cost (before transaction fees) would be $5.25 per share. Your net loss is $2.75 per share, which is the difference between the debit to close the position ($5.25) less the initial credit ($2.50) when the spread was established.

So you have a loss on the trade, but the loss is much less than the $11.20 per share loss experienced by those who bought the shares at $66, or the $5.50 per share loss for those who sold uncovered $66 puts prior to the decline.

With the spread you can precisely define your entry and exit points, without having to time them. And this works regardless of the price of the underlying stock.

Think about it this way. If you implemented the bull put spread on Telus two months ago, you would be required to buy shares at $66 until November, which is equal to an out-of-pocket cost of $63.50 after accounting for the $2.50 net credit received from the spread.

But since you also have the right to put the stock to someone else at $60 per share, you have an exit point or better, a value that can be applied against the purchase price of the stock.

For example, let’s examine this position assuming for a moment that at the November expiration Telus is trading where it is today; $54.80. Further let’s assume you want to hold the stock. At the November expiration, the November 66 puts would be assigned and you would buy the shares at $66 per share. You would then sell your November 60 puts at their intrinsic value of $5.20 ($60 strike less $54.80 stock price = $5.20 intrinsic value).

Your net out-of-pocket cost for the Telus shares is $66 less $2.50 net credit when spread was established, less $5.20 from the sale of the November 60 puts equals $58.30. The net out-of-pocket cost is particularly relevant, as it goes to how I define a precise entry point. With the bull put spread, in a worst case scenario, you end up with stock at a net price that is never more than $$3.50 (maximum per share risk on the spread) above the current market price.

From my perspective, that is probably one of the best ways to accumulate a portfolio of stocks over time. It also provides a template for deciding whether you actually want to buy Telus in November. Maybe in November, the reasons for buying the stock are no longer relevant, in which case you would take your limited loss and move to another security.

As for the upside, it plays to the portfolio’s bottom line immediately. If the stock in does go up above the $66 strike price of the short put, you will earn the net credit received.