Visa stock is showing strength and recently broke out above resistance at 235.
Rather than buying the stock outright, we could sell a cash secured put to generate some income, or buy the stock for lower than it is trading today.
A cash-secured put is a slightly less bullish trade than buying the stock. It is considered a neutral to slightly bullish trade.
A cash-secured put involves writing 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 be assigned and acquire the stock below the current price.
Selling put options is an easy place for investors to start with options. They are like a covered call and are pretty easy to understand once you know the basics.
Traders selling puts should understand that they may be assigned (i.e., forced to buy) 100 shares at the strike price.
Cash-Secured Put In Visa Stock
Let's look at an example using Visa stock.
With the stock trading around 238, investors could sell an August put with a strike price of 230 for around $3.15.
Investor selling this put would receive $315 into their account, which would be theirs to keep. If Visa falls below 230 by Aug. 18, they would be required to buy 100 shares at 230. The effective net cost of the position would be 226.85, thanks to the option premium received.
That is 4.7% below the current price.
If the stock stays above 230 at expiry, the put expires worthless, leaving the trader with a 1.39% return on capital at risk.
That works out to be 11.26% annualized.
The main risk with the trade is similar to outright stock ownership. If the stock falls quickly, the trade will suffer a loss. However, the premium received will help to offset the loss.
The maximum loss on the trade would occur if V fell to $0, which would see the trade lose $22,685 but most traders would cut losses long before then.
Generate Return Perhaps Without Ever Owning Visa Stock
Cash-secured puts are a great way to generate a return on strong stocks, potentially without ever having to take ownership.
If the put does get assigned, the investor takes ownership with a reduced cost base and can potentially begin selling covered calls to generate additional income from the position.
A stop loss could be set if Visa stock drops 8% from the time of trade entry.
According to the IBD Stock Checkup, Visa stock is ranked No. 2 in its industry group and has a Composite Rating of 93, an EPS Rating of 93 and a Relative Strength Rating of 79.
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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
