KKR & Co. was added to IBD Leaderboard and SwingTrader on Jan. 19 with an entry point of 83.01.
Today, we are looking at how to potentially buy KKR for a discount 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 to be assigned and acquire the stock below the current price.
Selling put options is an easy place for investors to start out with options. They are very similar to a covered call and are quite easy to understand once you know the basics.
Traders May Be Forced To Buy KKR
It's important that anyone selling puts understands that they may be assigned 100 shares at the strike price.
Let's take a look at an example using KKR stock.
With the stock closing Tuesday at 83.99, investors could sell a March 15 put with a strike price of 80 for around $1.95.
Investors selling this put would receive $195 into their account, which would be theirs to keep. If KKR falls below 80 by March 15, they would be required to buy 100 shares at 80.
The effective net cost of the position would be 78.05 thanks to the option premium received. That's 7.07% below Friday's closing price.
If the stock stays above 80 at expiry, the put expires worthless. That leaves the trader with a healthy 2.5% return on capital at risk in 52 days. That works out at around 17.5% per annum.
Risk Of KKR Option Trade
The main risk with the trade is similar to outright stock ownership. That is, if the stock falls quickly, the trade will suffer a loss, however the loss will be partially offset by the premium received for selling the put.
The maximum loss on the trade would occur if KKR & Co. shares fell to $0, which would see the trade lose $7,805. But most traders would cut losses long before then.
Cash secured puts are a wonderful way to generate a healthy 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. Traders can potentially begin selling covered calls to generate further income from the position.
According to the IBD Stock Checkup, KKR & Co. is ranked No. 5 in its industry group. It has a Composite Rating of 96, an EPS Rating of 81 and a Relative Strength Rating of 95.
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
