KKR has been a strong performer this year, rising 82% year-to-date. With KKR stock pulling back to the 50-day moving average, it could provide a nice entry point for investors.
KKR is a leading global investment firm specializing in private equity, energy, infrastructure, real estate, and credit strategies.
In the third quarter, KKR reported a 58% increase in adjusted net income, reaching $1.2 billion or $1.38 per adjusted share, surpassing analyst expectations of $1.21 per share.
Record-high fee-related earnings of $1 billion, attributed to managing $624 billion in assets, and profits from its insurance business drove the increase.
Additionally, KKR raised $87 billion in new capital year-to-date. That more than doubled the amount raised in the first nine months of 2023 and reflected strong investor confidence.
KKR Cash Secured Put
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 a cash secured put trade might look on KKR.
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.
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 KKR at a price of 145 any time between now and March 21.
Selling a March 21-expiration, 145-strike put would generate around $625 in premium. The put seller would have the obligation to purchase 100 shares of KKR at 145 if called upon to do so by the put buyer.
KKR Stock Break-Even 8% Below Tuesday's Close
To calculate the breakeven price, take the strike price less the premium received. In this case, that's a breakeven price of 138.75.
That's 8.3% below Tuesday's closing price.
If KKR stock stays above 145 at expiry, the put expires worthless, leaving the trader with a strong 4.5% return on capital at risk. That works out to around 17% 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 KKR stock fell to $0. That would see the trade lose $13,875, 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.
Assignment Not A Bad Alternative
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.
According to the IBD Stock Checkup, KKR stock is ranked No. 3 in its industry group. It has a Composite Rating of 98, an EPS Rating of 93 and a Relative Strength Rating of 92.
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
