Marathon Digital is showing rising relative strength and has moved more than 50% past a 12.82 entry in a June breakout from a second-stage consolidation.
Marathon Digital is a digital asset technology company that mines cryptocurrencies. It has a focus on the blockchain ecosystem and the generation of digital assets.
One way to take ownership of a stock for less than the current price is via a cash secured put option trade.
Let's take a look at how such a trade might look on Marathon Digital stock, which is rebounding from its 200-day moving average.
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.
Keep Premium Or Buy Marathon Digital At Discount
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.
It's important that anyone selling puts understands that they may be assigned 100 shares at the strike price.
Let's assume we're happy to buy 100 shares of Marathon stock at a price of 19 any time between now and June 21.
Selling a June 21, 19 strike put would generate around $325 in premium. The put seller would have the obligation to purchase 100 shares of Marathon at 19 if called upon to do so by the put buyer.
The break-even price for the trade equals the strike price less the premium received. In this case, that's a break-even price of 15.75.
Potential 20% Return On Marathon Stock
That's 18.98% below Tuesday's closing price.
If the stock stays above 19 at expiry, the put expires worthless. That leaves the trader with a healthy 20.6% return on capital at risk. That works out to about 127% on an annualized basis.
The main risk with the trade is similar to outright stock ownership. If the stock falls sharply, 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 Marathon stock fell to $0, which would see the trade lose $1,575. But most traders would cut their losses before then.
Stop Loss For Marathon Stock Trade
A stop loss could be set if Marathon stock drops below 17.50.
Cash secured puts are a fantastic way to generate a nice return on stocks the trader is happy to own.
If the put does get assigned, the investor takes ownership with a reduced cost base. The trader then can potentially begin selling covered calls to generate additional income from the position.
According to the IBD Stock Checkup, Marathon stock is ranked No. 12 in its industry group. It has a Composite Rating of 93, an EPS Rating of 81 and a Relative Strength Rating of 95.
Marathon Digital is due to report earnings in early May, so this trade would have earnings risk if held to expiration.
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
