HP Inc. (NYSE:HPQ), the renowned hardware company, recently provided optimistic guidance regarding its free cash flow (FCF) for the fiscal year ending October 31st. This promising outlook could potentially drive HPQ stock up by 14% to 19.5%, rendering short-put plays particularly attractive, particularly for current shareholders seeking additional income.
The Value Proposition of Short Put Plays
With HPQ stock currently trading at $29.82 per share, short-put options present an enticing opportunity, especially with their midprice standing at just 4 cents. This implies an already profitable trade for investors and underscores the attractiveness of leveraging short-put strategies to generate income.
Bullish Free Cash Flow Projections
HP’s latest quarter ending January 31st reported $25 million in FCF. However, for the full fiscal year, HP anticipates FCF ranging between $3.1 billion and $3.6 billion. Based on analyst estimates of $53.66 billion in revenue, this represents an FCF margin of approximately 6.33%.
Given a conservative market assessment of a 10% FCF yield, HPQ’s market capitalization could reach $34 billion, translating to a potential gain of 14% from its current market cap of $29.77 billion. Looking ahead, with analysts forecasting $55.6 billion in revenue for the next year, FCF could surge to $3.558 billion, projecting a potential market cap of $35.58 billion, equivalent to a 19.5% increase over the current market cap.
Seizing Short Put Opportunities
Considering the estimated range of HPQ stock’s value, ranging from 14% to 19.5% higher, investors may find it prudent to continue shorting near-term expiry out-of-the-money (OTM) options to capitalize on this potential upside. For instance, shorting OTM put options with strike prices below the current market price could offer additional income, particularly for risk-tolerant investors.
Mitigating Downside Risks
However, it’s essential to acknowledge the downside risks associated with short-put strategies. Investors must be prepared for the possibility of their cash-secured positions being exercised if the stock price declines sharply. To mitigate this risk, investors may opt to sell short further out expiration strike prices, offering a broader safety net while still providing income potential.
Conclusion
HPQ appears undervalued based on its robust free cash flow guidance. Consequently, shorting out-of-the-money put options presents an attractive income-generating opportunity, particularly for existing shareholders seeking to leverage HP’s promising prospects. Nevertheless, investors should exercise caution and conduct thorough risk assessments before engaging in short-put plays.
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