Interactive Brokers was Friday's IBD Stock of the Day and is highly rated.
Interactive Brokers operates as an automated global electronic market maker and broker. The company specializes in routing orders, besides executing and processing trades in securities, futures, foreign exchange instruments, bonds and mutual funds.
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 the stock.
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.
Trade Produces $645 In Premium
Let's assume we're happy to buy 100 shares of Interactive Brokers stock at a price of 130 any time between now and Dec. 20.
Selling a Dec. 20 expiry, 130-strike put would generate around $645 in premium. The put seller would have the obligation to purchase 100 shares of Interactive Brokers stock at 130 if called upon to do so by the put buyer.
The break-even price for the trade can be calculated by taking the strike price less the premium received. In this case, that's 123.55. And that's 6.27% below Tuesday's closing price.
If the stock stays above 130 at expiry, the put expires worthless, leaving the trader with a healthy 5.22% return on capital at risk. That works out to 20.27% 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 the stock fell to zero. That would see the trade lose $13,000. But most traders would cut their losses before then.
Cash-secured puts are a fantastic way to generate a nice return on stocks traders are happy to own.
Interactive Brokers Leads Industry Group
If the put does get assigned, the investor takes ownership with a reduced cost base. Traders can potentially begin selling covered calls to generate additional income from the position.
According to the IBD Stock Checkup, IBKR stock is ranked No. 1 in its industry group. It has a Composite Rating of 99, an EPS Rating of 98 and a Relative Strength Rating of 91.
Interactive Brokers is due to report earnings in mid-October, so this trade should not have earnings risk.
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
