About one month ago, we looked at a cash secured put on Robinhood stock.
That trade has worked very well, and today we can look to reload as the stock continues to look strong.
Robinhood has high volatility, which means high option premiums. That can be great for option sellers.
Robinhood is a financial services company known for its commission-free stock, options and cryptocurrency trading platform, which has democratized access to the financial markets.
Since its IPO three years ago, the stock has been highly volatile. Regulatory scrutiny, competition and changes in user-engagement trends have influenced the stock.
One way to take ownership of a stock for less than the current price is via a cash-secured put option trade.
Setting Up Robinhood Trade
Let's take a look at how a cash secured put trade might look on Robinhood.
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, traders could be assigned and acquire the stock below the current price.
It's important that traders selling puts understand they may be assigned 100 shares at the strike price.
Let's assume we're happy to buy 100 shares of Robinhood at a price of 25 any time between now and Nov. 15. (The stock closed at 25.61 Tuesday.)
Selling a November-expiry, 25-strike put would generate around $195 in premium. The put seller would have the obligation to purchase 100 shares of Robinhood stock at 25 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 which in this case gives a break-even price of 23.05.
That's 10% below yesterday's closing price.
Robinhood Trade Could Return 8.5%
If the stock stays above 25 at expiry, the put expires worthless, leaving the trader with a high 8.46% return on capital at risk. That works out to around 81% 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 Robinhood shares fell to $0, which would see the trade lose $2,305. But most traders would cut their losses before then.
Cash-secured puts are a fantastic way to generate a nice return on stocks the trader is happy to own.
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.
Robinhood Leads Its Industry Group
According to the IBD Stock Checkup, Robinhood is ranked No. 1 in its industry group. It has a Composite Rating of 99, an EPS Rating of 81 and a Relative Strength Rating of 97.
Robinhood is due to report earnings on Oct. 30, so this trade would have earnings risk if held to expiration.
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
