Marvell Technology is set to report earnings on May 30 after the closing bell. The options market is pricing in a 10% move in either direction, and higher implied volatility ahead of earnings makes selling premium more attractive. Here's how you can set up a cash-secured put on Marvell stock.
What Makes A Cash-secured Put Attractive?
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.
The cash-secured put is very similar to a covered call and quite easy to understand once you know the basics.
Earnings cheat sheet this week includes Nvidia on Wednesday
It's important that anyone selling puts understands that they may be assigned 100 shares at the strike price. That's why you need to set the cash aside.
For Marvell stock, a trader selling the May 31 put with a strike price of 69 will generate around $1.80 in premium per contract. That puts $180 in the pocket of the put seller.
The put seller takes on the obligation to purchase 100 shares of MRVL stock at 69 if called upon to do so by the put buyer. By setting aside $6,900 in cash, you have that potential scenario covered.
Analyzing The Marvell Stock Option Trade
The break-even price for the trade takes the strike price less the premium received, in this case that gives you a break-even price of 67.20. That's 8.1% below Marvell's price this morning around 73.15.
If the stock stays above 69 at expiry, the put option expires worthless. That puts the pocketed premium of $180 at a 2.7% return on capital at risk, or roughly 90% 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 is partially offset by the premium received for selling the put. In this case buying the stock outright risks $7,315 as opposed to $6,720 if you get assigned shares.
Cash secured puts are a fantastic way to generate a return on stocks the trader is happy to own, or pick up shares at a discount.
If Marvell stock trades below 69 and the put gets assigned, investors can then sell covered calls against the position to generate further income.
According to IBD Stock Checkup, MRVL stock ranks No. 8 overall in its group. It has a Composite Rating of 87, an EPS Rating of 69 and a Relative Strength Rating of 87.
Please 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
