Robinhood Markets is set to report earnings on Feb. 12 after the closing bell, and the options market is pricing in a 14.6% move in either direction.
Robinhood is a financial services platform known for its commission-free trading model and user-friendly mobile application, which has attracted a predominantly younger investor base.
The company ranked first in Investor's Business Daily's survey for mobile trading platforms. It offers features like 24-hour trading and advanced charting tools.
In the third quarter of 2024, Robinhood reported a significant earnings increase, positioning the company on track for its first annual profit.
Robinhood 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 similar to a covered call and are quite easy to understand once you know the basics.
Traders selling puts should understand they may be assigned 100 shares at the strike price.
Trade Generates $100 In Premium
For Robinhood, a trader selling the Feb. 7 put with a strike price of 48.50 will generate around $100 in premium per contract.
The put has a delta of 28, which means there is an estimated 72% chance it will expire worthless.
The put seller would have the obligation to purchase 100 shares of Robinhood at 48.50 if called upon to do so by the put buyer.
The break-even price is calculated by taking the strike price less the premium received. In this case, that's 47.50. That's 7% below Wednesday's closing price.
If the stock stays above 48.50 at expiry, the put option expires worthless. That leaves the trader with a 2.11% return on capital at risk in just a few days. That works out to about 80% on an annualized basis.
Risk Of Robinhood Stock Option Trade
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 premium received from selling the put will partly offset the loss.
Cash secured puts are a fantastic way to generate a return on stocks the trader is happy to own.
With this example, the trader generates a 2.11% return in just over a week. Or they get to purchase Robinhood stock at a reasonable discount.
If Robinhood Markets trades below 48.50 and the put gets assigned, investors can then sell covered calls against the position to generate further income.
According to the IBD Stock Checkup, Robinhood stock is ranked No. 6 in its industry group. It has a Composite Rating of 97, an EPS Rating of 81 and a Relative Strength Rating of 99.
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
