Nike is set to report earnings on Thursday next week. The options market is pricing in a 7.8% move in either direction. So, we're looking at selling a cash secured put in Nike stock just outside the expected range.
A cash-secured put involves selling an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock.
The goal? Either have the put expire worthless and keep the premium, or take assignment and acquire the stock below the current price.
The results are very similar to a covered call and are quite easy to understand once you know the basics.
Traders selling puts must understand they may be assigned 100 shares at the strike price in Nike stock.
Nike Stock Today: Setting Up The Trade
For Nike stock, a trader selling the June 30 put with a 101 strike price recently generated around $1.00 in premium per share contract. On Thursday morning, that premium fell by 15 cents per contract.
The put seller would have the obligation to purchase 100 shares of Nike stock at 101 if called upon to do so by the put buyer.
The break-even price for the trade? Calculate it by taking the strike price (101) less the premium received (1.00) — which in this case this gives us a break-even price of 100.
That's almost 9% below NKE's Wednesday closing price and outside the expected range for the stock.
The Profit Line
If Nike stock stays above 101 at expiry, the put option expires worthless. This leaves the trader with a generous 1% return on capital at risk. That works out to around 40.6% 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 will be 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, traders either generate a 1% return in seven days, or get to purchase Nike stock at a reasonable discount to Wednesday's price.
Generating More Income This Way
If Nike stock trades below 101 and the put gets assigned, investors can then sell covered calls against the position to generate further income.
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
