BHP Group is a high dividend payer that might be of interest to income investors.
The stock currently pays a 5.26% annualized dividend and has strong support around the 55 price level.
BHP Group is one of the world's largest diversified resource companies, with operations across several continents.
It engages in exploration, development and production of oil and gas properties. It also mines for copper, silver, lead, zinc, molybdenum, uranium, gold and iron ores, as well as metallurgical and energy coal.
One way to take ownership of a stock for less than the current price is via a cash secured put option.
Let's take a look at how a cash secured put trade might look on BHP stock.
As a reminder, 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.
Traders benefit by either having the put expire worthless and keeping the premium, or being assigned and acquiring the stock below the current price.
It's Like Buying BHP Stock At A Discount
It's important that those selling puts understand that they may be assigned 100 shares at the strike price.
Let's assume we're happy to buy 100 shares of BHP stock at a price of 55 any time between now and Nov. 15.
Selling a Nov. 15 put with a 55 strike price would generate around $250 in premium. The put seller would have the obligation to purchase 100 shares of BHP stock at 55 if called upon to do so by the put buyer.
The break-even price for the trade can be calculated by taking the strike price less the premium received. In this case, that's break-even price of 52.50. That's 7.9% below Wednesday's closing price.
If the stock stays above 55 at expiry, the put expires worthless, leaving the trader with a healthy 4.76% return on capital at risk. That works out to around 14.36% 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 from selling the put.
Trade Offers A Return And Chance To Own Shares
The maximum loss on the trade would occur if BHP stock fell to $0 which would see the trade lose $5,250, but most traders would cut their losses before then.
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. He or she can potentially begin selling covered calls to generate additional income from the position.
According to the IBD Stock Checkup, BHP stock is ranked No. 11 out of 40 stocks in its industry group. It has a Composite Rating of 33, an EPS Rating of 29 and a Relative Strength Rating of 22.
BHP Group is due to report earnings on Aug. 27, so this trade would have earnings risk if held to expiration.
Checking On Prior Trade Ideas
Last week's bullish diagonal trade on American Express has done well and can be closed for a nice profit. Same goes for the butterfly trade on Goldman Sachs detailed on June 25.
A butterfly on Microsoft explained on June 12 is up over $430 and can be also closed.
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
