Celsius Holdings had a powerful breakout Wednesday and is sitting nicely above the 50-day moving average.
Today, we are looking at how to potentially buy CELH 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.
Selling Puts On CELH Stock
It's important that anyone selling puts understands they may be assigned 100 shares at the strike price.
Let's take a look at an example using CELH stock.
With the stock closing Wednesday at 55.72, investors could sell an April 19 put with a strike price of 55 for around $6.05.
An investor selling this put would receive $605 into his or her account, which would be theirs to keep. If CELH stock falls below 55 by April 19, traders would be required to buy 100 shares at 55. The effective net cost of the position would be 48.95 thanks to the option premium received.
That's 12.15% below Wednesday's closing price.
If the stock stays above 55 at expiry, the put expires worthless. That leaves the trader with a healthy 12.36% return on capital at risk in 114 days. That works out at around 39% per annum.
The Risk With Selling Puts
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.
The maximum loss on the trade would occur if Celcius Holdings fell to $0. In that case, the trade loses $4,895. 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 base and can potentially begin selling covered calls to generate further income from the position.
According to the IBD Stock Checkup, CELH stock is ranked No. 7 in its group and has a Composite Rating of 87, an EPS Rating of 81 and a Relative Strength Rating of 87.
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
