Cloudflare (NET) recently joined IBD SwingTrader as a new buy opportunity, with a price target of 115.39. NET stock is currently showing a Composite Rating of 87, an Earnings Per Share Rating of 41 and a Relative Strength Rating of 95.
In this column, we have looked at cash-secured puts as a way to potentially take ownership of a stock for less. However, sometimes the stock never comes down below our strike price.
So, one way we can help ensure we get assigned on the stock is by selling an in-the-money cash-secured put.
NET Stock: How To Set Up A Cash-Secured Put
As a reminder, a cash-secured put involves writing a put option and simultaneously setting aside enough cash to buy 100 shares of the stock per option contract. The goal is to either have the put expire worthless and keep the premium or be assigned and acquire the stock.
Selling an in-the-money put is a more aggressive way to trade a cash-secured put.
Let’s look at an example using NET stock. With the stock ending Wednesday’s trading at 109.52, investors could sell a Sept. 17-expiration put with a strike price of 115 for around $11.75.
An investor selling this put would receive $1,175 into their account, which would be theirs to keep. If NET stays below 115 by Sept. 17, they would be required to buy 100 shares at 115. The effective net cost of the position would be 103.25 per share, thanks to the option premium received.
That is 5.7% below Wednesday’s closing price.
If the stock moves above 115 at expiry, the put expires worthless, leaving the trader with an 11.38% return on capital at risk.
Risk Vs. Reward
That works out to 73% annualized.
The main risk with the trade in NET stock is similar to outright stock ownership. If the stock falls quickly, the trade will suffer a loss. However, the premium received will help offset the loss. The maximum loss on the trade would occur if Cloudflare fell to zero, which would see the trade lose $10,325, but most traders would cut losses long before then.
Selling in-the-money puts allows traders to generate a higher option premium and increase the chance of being assigned the stock.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions. Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
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