Anheuser-Busch closed at the high of the day yesterday and is back above the 50-day moving average. Here's how to potentially buy BUD stock for a discount via an option strategy called a cash-secured put. It also works out as a potential income strategy.
A cash-secured put involves selling an at-the-money or out-of-the-money put option. The trade simultaneously sets aside enough cash to buy the stock.
The goal here? Either have the put expire worthless and keep the premium, or to take assignment and acquire the stock below the current price.
Selling put options is a good place to start for option investors. Cash-secured puts are very similar to a covered call and are quite easy to understand once you know the basics. But it's important to be aware that selling the put means you may be assigned 100 shares of the stock, in this case BUD stock, at the strike price.
BUD Stock Today: The Cash-Secured Put
BUD stock notched a number of three-weeks-tight areas in the last few months as it hugged its 50-day line.
With BUD stock trading at 57.50, investors could sell a Nov. 17 put with a strike price of 55 for around 95 cents. An investor selling this put would receive $95 into their account, which would be theirs to keep.
But if BUD stock falls below 55 by Nov. 17, the put seller has the obligation to purchase 100 shares of BUD stock at 55 if called upon to do so by the put buyer. So you need to have $5,500 set aside in case that happens. That's the cash that secures your short put position.
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Also consider that the option premium received makes the net cost of the shares 54.05. That means you effectively pick up 100 shares of BUD stock at a 6% discount to the current price.
If BUD stock stays above 55 at expiry, that's not a bad scenario either. The put option expires worthless and the entire premium is kept. That leaves the trader with a healthy 1.8% return on capital at risk in 59 days. That works out at around 10% per annum.
How Much Is The Risk?
The main risk with the trade is similar to outright stock ownership. If BUD stock falls significantly, the trade will suffer a loss. However, the loss gets partially offset by the premium received for selling the put.
The maximum loss on the trade occurs in the unlikely case that Anheuser-Busch stock falls to $0. That would see the trade lose $5,405. Of course, 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 and can potentially begin selling covered calls to generate further income from the position.
According to IBD Stock Checkup, BUD stock is ranked No. 8 in its group and has a Composite Rating of 58, an EPS Rating of 48 and a Relative Strength Rating of 53.
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 Twitter at @OptiontradinIQ.
