Fifth Third Bancorp broke out Tuesday and was the IBD Stock Of The Day.
Today, we are looking at how to potentially buy Fifth Third stock 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.
It's important to understand that anyone selling puts may be assigned 100 shares at the strike price.
Fifth Third Bancorp Trade Setup
Let's take a look at an example using Fifth Third Bancorp stock.
With the stock trading at 36.04, investors could sell an April 19-expiry put with a strike price of 35 for around $1.20 late Wednesday.
Investors selling this put would receive $120 into their account, which would be theirs to keep. If Fifth Third stock falls below 35 by April 19, they would be required to buy 100 shares at 35. The effective net cost of the position would be 33.80 thanks to the option premium received.
That's 6.22% below Wednesday's closing price.
If the stock stays above 35 at expiry, the put expires worthless. It would leave the trader with a healthy 3.55% return on capital at risk in 43 days. That works out at around 29.45% per annum.
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.
Max Loss On Fifth Third Bancorp Unlikely To Happen
The maximum loss on the trade would occur if Fifth Third Bancorp stock fell to $0. That would see the trade lose $3,380. 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 and can potentially begin selling covered calls to generate further income from the position.
According to the IBD Stock Checkup, Fifth Third Bancorp stock is ranked No. 1 in its industry group. It has a Composite Rating of 82, an EPS Rating of 67 and a Relative Strength Rating of 86.
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
