Engaging in the sale of cash-secured puts on stocks presents an opportunity for investors to earn additional income. A cash-secured put strategy involves writing put options at or out of the money while simultaneously reserving sufficient cash to purchase the stock if needed. The objective is either for the put option to expire without value, enabling the retention of the premium, or to acquire the stock at a price below its current value. Put sellers must recognize the possibility of being obligated to purchase 100 shares at the strike price.
Why Opt for Cash-Secured Puts?
Cash-secured puts represent a bullish stance, albeit slightly less bullish than direct stock ownership. Investors may choose this strategy for stocks they anticipate remaining stable, experiencing slight gains, or at least not significant declines.
Cash-secured put sellers commit capital to buy shares and are willing to take ownership if required. In contrast, naked put sellers aim solely to profit from option premiums without intending to hold the underlying stock.
The more bullish the investor, the nearer to the current stock price they should sell the put, maximizing premium while heightening assignment likelihood. Conversely, selling deep out-of-the-money puts yields minimal premium and lower assignment probability.
NKE Cash Secure Put Example
For instance, with NKE priced at $92.56, the June 21 put option with a $90 strike price traded at approximately $2.40. Sellers of this put received $240 in premium with an obligation to purchase 100 NKE shares at $90. Regardless of NKE’s future price (above or below $90), put sellers must honor the contract.
If NKE remains above $90 by June 21, the put expires worthless, and the seller retains the $230 premium. The net capital at risk equals the strike price minus the premium ($90 – $2.30). In the case of assignment, the net cost basis becomes $87.70, representing a 5.36% discount from its recent price of $92.56.
Should NKE stay above $90, the return on capital would be:
$230 / $8,770 = 2.74% over 81 days, translating to a 12.35% annualized return.
Conclusion
Through such strategies, investors can either secure a 12.35% annualized return or acquire the stock at a 5.36% discount. These insights can be further explored using tools like the Naked Put Screener, considering various parameters for customization.
Company Insight
NIKE Inc. (NYSE:NKE) dominates the global market in athletic footwear, apparel, and related products, boasting a robust brand portfolio including Nike Pro, Nike Golf, and Air Jordan. Its products cater to diverse customer segments with premium quality and innovative designs, bolstered by strong brand associations with renowned athletes and teams worldwide.
Summary
While cash-secured puts necessitate significant capital commitment, they offer a viable means to generate income from desired stocks. Risk-averse traders may opt for out-of-the-money put options to mitigate downside risks. However, it’s essential to acknowledge the inherent risks associated with options trading, including the potential for a 100% loss of investment. This article serves for educational purposes only and does not constitute investment advice. Conduct thorough research and consult a financial advisor before making investment decisions.
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