Embrace the strategy of selling cash secured puts to procure additional income from stocks you wouldn’t mind owning. This involves writing at-the-money or out-of-the-money put options while setting aside ample cash to purchase the stock if required. The objective is to either witness the put expiring valueless, retaining the premium, or getting assigned the stock at a price below the current level. Keep in mind, as a put seller, you might have to procure 100 shares at the strike price.
The Rationale Behind Cash Secured Puts
Selling cash secured puts exhibits a bullish stance, albeit less fervent than direct stock ownership. For a strongly bullish outlook, explore strategies like long calls or bull call spreads. Opt for put selling on stocks you anticipate to remain stable, experience a slight growth, or at worst, not decline significantly.
Cash secured put vendors reserve enough funds to secure the shares and are content with acquiring the stock if called upon by the put buyer. Conversely, naked put sellers have no intention of possessing the stock and merely seek to leverage premium through option selling tactics.
The more bullish a cash secured put investor, the closer they should position the put to the prevailing stock price. This approach maximizes premium and elevates the chances of an assignment. By contrast, vending deep-out-of-the-money puts garners minimal premium and decreases the likelihood of assignment.
Illustrative NKE Cash Secure Put Scenario
Yesterday, when NKE traded at 92.56, the June 21 put option with a $90 strike price was priced around $2.40. Vendors of this put would pocket $240 as option premium. In return, they commit to procuring 100 NKE shares at $90. By June 21, even if NKE dips to $85, $80, or $60, the put vendor must secure 100 shares at $90.
However, if NKE persists above $90, the put option becomes worthless, and the trader retains the $230 premium. The net risk capital equals the $90 strike price, minus the $2.30 option premium. Hence, if assigned, the net cost basis stands at $87.70. Not bad for a stock priced at $92.56 – a 5.36% markdown from yesterday’s levels.
If NKE maintains above $90, the return on capital equates to $230 divided by $8,770, totaling 2.74% in 81 days, translating to an annualized 12.35% return.
The put seller attains a 12.35% annualized return or secures the stock at a 5.36% discount. Explore analogous strategies using the Naked Put Screener, configurable with the parameters presented below.
Company Insights
NIKE Inc. boasts a Barchart Technical Opinion of 88% Sell, with a strong short-term outlook favoring the current trajectory.
Among 30 analysts tracking NKE, 16 advocate a Strong Buy, 2 suggest a Moderate Buy, 11 maintain a Hold rating, and 1 proposes a Strong Sell rating.
NIKE Inc. specializes in crafting athletic footwear, apparel, equipment, and accessories for individuals globally. Bolstered by a robust brand portfolio, such as Nike Pro, Nike Golf, Nike, and Air Jordan, it delivers premium, stylish, and top-notch products aligned with prevailing consumer preferences.
Renowned as the global frontrunner in athletic gear, Nike’s ‘swoosh’ logo and ‘just do it’ motto enjoy worldwide recognition. Alongside affiliations with iconic athletes like Michael Jordon and Roger Federer, top pro and college teams, it sustains a formidable brand presence in vital markets like the U.S., U.K., Japan, and China.
Its product lineup comprises six core categories: running, NIKE basketball, the Jordan brand, football, training, and sportswear (sports-inspired lifestyle items).
Closing Thoughts
Though this strategy necessitates substantial capital, it serves as a lucrative means to generate income from desired stock holdings. In case of assignment, investors can relish a generous 1.51% dividend from NKE. This method is applicable to other stocks but start cautiously until you grasp the mechanism.
Prudent traders may contemplate buying an out-of-the-money put for downside protection.
Remember, options entail risks, with the potential for a full capital loss. This discourse aims for educational purposes solely and not as trade counsel. Conduct thorough research and consult a financial advisor before any investment decisions.
As of the publication date, Gavin McMaster held no positions (directly or indirectly) in the securities referenced herein. The information provided serves purely informational purposes. Refer to the Barchart Disclosure Policy for further details.
The author’s views expressed herein, though personal, may not align with those of Nasdaq, Inc.
