Royal Caribbean Group currently sits on IBD Leaderboard and is trading above the 21-, 50- and 200-day moving averages.
Today, we are looking at how to potentially buy RCL 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 remember that anyone selling puts understands they may be assigned (forced to buy) 100 shares at the strike price.
RCL Stock Option Trade Idea
Let's take a look at an example using RCL stock.
With the stock closing at 106.15 Tuesday, investors could sell a Sept. 15 put with a strike price of 100 for around $2.40.
Investor selling this put would receive $240 into their account, which would be theirs to keep. If RCL stock falls below 100 by Sept. 15, they would be required to buy 100 shares at $100. The effective net cost of the position would be $97.60 thanks to the option premium received.
That's 8.05% below Tuesday's closing price.
If the stock stays above 100 at expiry, the put expires worthless. That leaves the trader with a healthy 2.46% return on capital at risk in 37 days. That works out at around 24% 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.
How To Exit RCL Stock Option Trade
The maximum loss on the trade would occur if Royal Caribbean Group fell to $0, which would see the trade lose $9,760. 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. Traders can potentially begin selling covered calls to generate further income from the position.
According to the IBD Stock Checkup, Royal Caribbean Cruises stock is ranked No. 2 in its group and has a Composite Rating of 93, an EPS Rating of 75 and a Relative Strength Rating of 98.
Check out IBD's new OptionsTrader app for options education, trade ideas and more! Download from the Apple App Store today.
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 Twitter at @OptiontradinIQ
