Etsy has shown strong relative strength since July and is within striking distance of a 10-month high.
According to the IBD Stock Checkup, Etsy stock is ranked No. 5 in its group and has a Composite Rating of 92, an EPS Rating of 80 and a Relative Strength Rating of 93.
Etsy stock is showing a three-year EPS growth rate of 73% and a three-year sales growth rate of 55%, according to its Investors.com quote.
One way to take ownership of a stock for less than the current price is 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.
Keep Premium Or Buy At Discount
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 be assigned and acquire the stock below the current price.
Selling put options is an easy place for investors to start with options. They are like a covered call and are pretty easy to understand once you know the basics.
Traders selling puts should understand that they may be assigned — i.e., forced to buy — 100 shares at the strike price.
Let's look at an example using Etsy stock.
With the stock closing at 134.67 on Friday, investors could sell a March put with a strike price of 130 for around $10.30.
Investors selling this put would receive $1,030 into their account, which would be theirs to keep. If Etsy falls below 130 by March 17, they would be required to buy 100 shares at 130. The effective net price of the position would be 119.70, thanks to the option premium received.
That is 11.12% below Friday's closing price.
Expired Put Results In 8.6% Return
If the stock stays above 130 at expiry, the put expires worthless, leaving the trader with an 8.6% return on capital at risk.
That works out to be 52.35% annualized.
The main risk with the trade is similar to outright stock ownership. If the stock falls quickly, the trade will suffer a loss. However, the premium received will help to offset the loss.
The maximum loss on the trade would occur if Etsy fell to $0, which would see the trade lose $11,970. But most traders would cut losses long before then.
Cash-secured puts are a great way to generate a 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 additional income from the position.
Earnings Risk If Held Until Expiration
Etsy is due to report earnings toward the end of February, so this trade would have earnings risk if held to expiry.
Please 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
