Micron Technology stock is set to report earnings on June 26 after the closing bell and the options market is pricing in an 13.1% move in either direction.
Today, we're looking at selling a cash secured put to take advantage of the high implied volatility around the earnings announcement.
A cash-secured put involves selling an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock.
The goal is to either have the put expire worthless and keep the premium, or to take assignment and acquire the stock below the current price.
They are very similar to a covered call and are quite easy to understand once you know the basics.
Risk Of Having To Buy Micron Stock
It's important that anyone selling puts understands that they may be assigned 100 shares at the strike price.
For Micron stock, a trader selling the June 28 put with a strike price of 128 will generate around $2.10 in premium per contract.
The put seller would have the obligation to purchase 100 shares of Micron at 128 if called upon to do so by the put buyer.
The break-even price for the trade can be calculated by taking the strike price less the premium received. In this case, it gives a break-even price of 125.90. That's 14.8% below Monday's closing price.
If the stock stays above 128 at expiry, the put option expires worthless. It would leave the trader with a healthy 1.67% return on capital at risk. That works out to around 55% on an annualized basis.
The main risk with the trade is similar to outright stock ownership. If the stock falls significantly, the trade will suffer a loss. However, the loss will be partially offset by the premium received for selling the put.
Micron Stock Trade Can Return 1.7% In Just Days
Cash-secured puts are a fantastic way to generate a return on stocks the trader is happy to own.
With this example, the trader either generates a 1.67% return in a few days, or purchase Micron stock at a reasonable discount.
If Micron trades below 128 at expiry and the put gets assigned, investors can then sell covered calls against the position. That would generate further income.
According to the IBD Stock Checkup, Micron stock is ranked No. 5 in its industry group. It has a Composite Rating of 91, an EPS Rating of 34 and a Relative Strength Rating of 98.
It's important to 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 X/Twitter at @OptiontradinIQ
