Gilead Sciences is a high-dividend paying stock that is currently deeply oversold. One way to take ownership of a stock for less than the price is via an option strategy called a cash-secured put.
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 100 shares at the strike price.
Cash Secured Put On Gilead Sciences
Let's look at an example using Gilead stock.
With the stock trading at 61.90 Wednesday, investors could sell a March 18-expiration put with a strike price of 60 for around $1.65.
An investor selling this put would receive $165 into their account, which would be theirs to keep. If Gilead stock falls below 60 by March 18, they would be required to buy 100 shares at 60 each. The effective net cost of the position would be 58.35, thanks to the option premium received.
That is 5.75% below Wednesday's closing price.
If the stock stays above 60 at expiry, the put expires worthless, leaving the trader with a 2.83% return on capital at risk. That works out to be 35.59% at an annualized rate.
Risk Of Losing It All
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 Gilead stock fell to $0, which would see the trade lose $5,835, but most traders would cut losses long before then.
Cash-secured puts are a great way to generate a return on strong stocks, potentially without ever having to take ownership.
On the downside, Gilead is not highly rated with a Composite Rating of 40, an EPS Rating of 39 and a Relative Strength Rating of 37.
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.
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.
