Spotify is set to report earnings on Tuesday after the closing bell and the options market is pricing in a 9.7% move in either direction.
Spotify is a leading audio streaming service with over 626 million monthly active users as of June 2024.
In the second quarter of 2024, the company reported a 20% year-over-year revenue increase to 3.8 billion euros and achieved a gross margin of 29.2%.
Analysts have responded positively. Goldman Sachs upgraded Spotify's rating to buy and raising the price target to 425, citing confidence in user growth and engagement.
Additionally, Spotify's stock has surged following the exit of a streaming music rival, further solidifying its market position.
Spotify Stock Cash Secured Put
Today, we're looking at selling a cash secured put 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 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.
They are very similar to a covered call and are quite easy to understand once you know the basics.
It's important that anyone selling puts understands he or she may be assigned 100 shares at the strike price.
Spotify Trade Could Generate $600
For Spotify stock, a trader selling the Nov. 15 put with a strike price of 375 will generate around $600 in premium per contract.
The put has a delta of 20, which means there is an estimated 80% chance that it will expire worthless.
The put seller would have the obligation to purchase 100 shares of Spotify at 375 if called upon to do so by the put buyer.
The breakeven price for the trade can be calculated by taking the strike price less the premium received. In this case, that's a breakeven price of 369.
That's 10% below Monday's closing price and is just outside the expected range for the stock at the Nov. 15 expiration.
If the stock stays above 375 at expiry, the put option expires worthless, leaving the trader with a 1.63% return on capital at risk in just a few days. That works out to a 148% return on an annualized basis.
Risks Similar To Owning Spotify Shares
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, the trader either generates a 1.63% return in a week. Or they get to purchase Spotify at a reasonable discount on the current price.
If Spotify trades below 375 and the put gets assigned, investors can then sell covered calls against the position to generate further income.
According to the IBD Stock Checkup, Spotify is ranked No. 2 in its industry group. It has a Composite Rating of 97, an EPS Rating of 81 and a Relative Strength Rating of 94.
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
