Charles Schwab is starting to recover from the banking crisis that gripped the market earlier in the year.
Schwab stock is back above the 21- and 50-day moving averages and they are both starting to turn upward.
Rather than buying the stock outright, we could sell a cash secured put to generate some income, or buy the stock for a lower price than it is trading today.
A cash-secured put is a slightly less bullish trade than buying the stock. It is considered a neutral to slightly bullish trade.
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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 be assigned and acquire the stock below the current price.
An Easy Way To Start With Options
Selling put options is an easy place for investors to start with options. They are like a covered call and are pretty easy to understand once you know the basics.
Traders selling puts should understand that they may be assigned (i.e., forced to buy) 100 shares at the strike price.
Let's look at an example using Schwab stock.
With the stock closing at 54.61 Tuesday, investors could sell a July put with a strike price of 52.50 for around $1.80.
Investors selling this put would receive $180 into their account, which would be theirs to keep. If Schwab falls below 52.50 by July 21, they would be required to buy 100 shares at 52.50. The effective net cost of the position would be 50.70, thanks to the option premium received.
That is 7.16% below Tuesday's closing price.
Return On Trade Nearly 29% Annualized
If the stock stays above 52.50 at expiry, the put expires worthless, leaving the trader with a 3.55% return on capital at risk. That works out to be 28.8% at an annualized rate.
The main risk with the trade is similar to outright stock ownership. If the stock falls quickly, the trade will suffer a loss. However, the premium received will help to offset the loss.
The maximum loss on the trade would occur if Schwab fell to $0, which would see the trade lose $10,885. But most traders would cut losses long before then.
Cash-secured puts are a great way to generate a return on strong stocks, potentially without ever having to take ownership.
If the put does get assigned, the investor takes ownership with a reduced cost base and can potentially begin selling covered calls to generate additional income from the position.
Schwab Stock No. 8 In Its Group
According to the IBD Stock Checkup, Schwab stock is ranked No. 8 in its group and has a Composite Rating of 62, an EPS Rating of 94 and a Relative Strength Rating of 13.
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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 Twitter at @OptiontradinIQ
