Morgan Stanley is set to report earnings on Tuesday before the opening bell. The options market recently priced in a 3.8% move by the stock in either direction. So, let's look at selling a cash secured put in MS stock.
Such a trade attempts to take advantage of the high implied volatility around the earnings announcement.
A cash-secured put involves selling an at-the-money or out-of-the-money put option. A trader simultaneously sets aside enough cash to buy the stock.
The goal here? Either have the put expire worthless and keep the premium, or take assignment and acquire the stock below the current price. A cash-secured put is very similar to a covered call and quite easy to understand once you know the basics.
Anyone selling puts must understand that he or she may be assigned 100 shares per contract sold at the strike price.
MS Stock: The Trade Setup
For MS stock, a trader who sold the July 19-expiring put with a strike price of 104 last week would have generated around $1.80 in premium per stock, equal to $180 per contract. Due to gains by MS stock on Monday morning, the same put traded near $1.40 per contract.
The put seller would have the obligation to purchase 100 shares of MS stock at 104, 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 the trade offers a break-even price of 102.20, based on recent trading. That's 1.9% below Friday's closing price.
If MS stock stays above 104 at expiry, the put option expires worthless. It leaves the trader with a healthy 1.76% return on capital at risk — around 92% on an annualized basis.
The main risk with the trade is similar to outright stock ownership. If the stock falls significantly, the trade will suffer a loss. However, the loss gets partially offset by the premium received for selling the put.
Cash-secured puts are a fantastic way to generate a return on stocks the trader is happy to own.
With this example, the trader either generates a 1.76% return in a few days, or gets to purchase MS stock at a reasonable discount on the current price.
If Morgan Stanley stock trades below 104 and the put gets assigned, investors can then sell covered calls against the position to generate further income.
A Solid Composite Rating
According to IBD Stock Checkup, MS stock ranked 6th in its group and has a Composite Rating of 94 out of 99, an Earnings Per Share Rating of 68 and a Relative Strength Rating of 85.
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 setup is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
