CF Industries is a current Leaderboard watchlist stock, and it is forming a cup base.
According to the IBD Stock Checkup, CF stock is ranked No. 1 in its industry group and has a Composite Rating of 97, an EPS Rating of 99 and a Relative Strength Rating of 95.
CF stock is holding above its 21-, 50- and 200-day moving averages.
High inflation is exacerbating food insecurity, making it difficult for some households to afford food.
Stocks such as CF and Mosaic have performed well as the world faces shortages in fertilizers and other agricultural goods.
One way to take ownership of a stock for less than the price is via an option strategy called a cash-secured put.
Neutral To Slightly Bullish Trade
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.
Let's look at an example using CF stock.
With the stock trading at 105.38 on Friday, investors could sell a February put with a strike price of 100 for around $8.15.
What If Stock Falls Below Strike Price?
An investor selling this put would receive $815 into their account, which would be theirs to keep. If CF falls below 100 by Feb. 17, they would be required to buy 100 shares at 100. The effective net cost of the position would be 91.85, thanks to the option premium received. That is 12.84% below Friday's closing price.
If the stock stays above 100 at expiry, the put expires worthless, leaving the trader with an 8.87% return on capital at risk.
That works out to be 31.44% on an annualized basis.
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 CF fell to zero, which would see the trade lose $9,185. But most traders would cut losses long before then.
Traders Can Sell Calls If Assigned Shares
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.
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
