Uber Technologies is set to report earnings on Wednesday before the opening bell, and the options market is pricing in a 7.5% move in either direction.
Today, we're looking at selling a cash secured put to take advantage of the high implied volatility around the earnings announcement.
Last week's similar trade on Amazon.com worked and hopefully this one will, too.
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 is to either have the put expire worthless and keep the premium, or to take assignment and acquire the stock below the current price.
It is very similar to a covered call and quite easy to understand once you know the basics.
Risk Of Having To Acquire Uber Stock
It's important that anyone selling puts understands that he or she may be assigned 100 shares at the strike price.
For Uber stock, a trader selling the Feb. 9 put with a strike price of 66 late Friday would generate around $1.60 per share in premium per contract.
The put seller would have the obligation to purchase 100 shares of Uber stock at 66 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 a break-even price of 64.40. That's 5.39% below Friday's closing price.
If the stock stays above 66 at expiry, the put option expires worthless leaving the trader with a healthy 2.48% return on capital at risk. That works out to around 129% 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.
Traders Generate 2.48% Return In One Week
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 2.48% return in a week, or they get to purchase Uber stock at a reasonable discount to Friday's price.
If Uber stock trades below 66 and the put gets assigned, investors can then sell covered calls against the position to generate further income.
According to the IBD Stock Checkup, Uber stock is ranked No. 3 in its industry group. It has a Composite Rating of 87, an EPS Rating of 81 and a Relative Strength Rating of 97.
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
