Uber Technologies stock has had a strong run in recent weeks and now appears to be consolidating those gains.
Thankfully, we can use options to generate a return when stocks are consolidating. Let's say I have $6,000 that I want to invest into Uber stock, I could simply buy some shares and hope the stock rises.
But if I want a more conservative play that generates income, I could sell a Sept. 20 put with a strike price of 60 and set aside the $6,000 in case I am assigned on the short put.
That 60 strike put generates around $6.40 in option premium in just over nine months. So, the $6,000 allocation to Uber is generating an annualized return of 16.57%.
What's the catch? Well, much like owning Uber shares, if the stock keeps dropping, the sold put will lose money in the short-term.
If Uber stock falls below 60 next September, then the put seller will be forced to buy 100 shares at 60.
If Uber Stock Hold Above Strike, Sellers Keeps Premium
But, if Uber stays above 60 then the trade achieves an 16.57% per annum return if the put expires worthless.
Cash secured puts are a bullish strategy but are considered slightly less bullish than owning Uber stock because the potential gains are limited to the premium received.
The 60 strike put currently has a delta of 38. So selling this put gives an exposure roughly equivalent to owning 38 shares of Uber stock. But this will change as the stock moves up and down.
One method that can help cut the risk is to turn it into a spread and buy a 50 strike put. This turns the trade into a bull put spread.
This is one of my favorite strategies for generating income on stocks I'm willing to own if they drop.
According to the IBD Stock Checkup, Uber stock is ranked No. 14 in its industry group and has a Composite Rating of 86, an EPS Rating of 81 and a Relative Strength Rating of 97.
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
