Iron Mountain ranks No. 1 in IBD's Commercial Services-Document Management industry group. So today we're looking at how to sell a cash secured put on IRM stock. But first, what is a cash secured put?
What Is A Cash Secured Put?
See it as a slightly less bullish trade than buying the stock. It is considered a neutral to slightly bullish trade.
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 have the put expire worthless and keep the premium. Or to get assigned the put and acquire the stock below the current price.
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 100 shares at the strike price.
IRM Stock Today
With IRM stock recently trading at 53.23 earlier this week, investors could sell an Oct. 21-expiration monthly put with a strike price of 52.50 for around $2.10 a share.
An investor selling this put would receive $210 into the account, which would be his or hers to keep. If IRM falls below 52.50 by Oct. 21, the trader would be required to buy 100 shares at 52.50. The effective net cost of the position would be 50.40, thanks to the option premium received.
That is 5.3% below Tuesday's closing price. So, if the stock stays above 52.50 at expiry, the put expires worthless, leaving the trader with a 4.2% return on capital at risk. That works out to be 26.2% annualized.
Risk Vs. Reward
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 IRM fell to $0. The trade would lose $5,040, but most traders would cut losses long before then.
With IRM set to report earnings in early November, this trade should have no earnings risk. 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.
Solid IBD Ratings
According to IBD Stock Checkup, Boston-based Iron Mountain ranks No. 1 overall in its group. The stock debuted in 1997 and has a Composite Rating of 90, an EPS Rating of 87 and a Relative Strength Rating of 89. As a global leader for storage and information management services, it helps customers reduce costs and mitigate risks associated with protection and storage of their information assets.
The company holds a three-year annualized EPS growth rate of 20%. IRM stock also shows a dividend yield of 4.5%.
Please remember that options are risky, and investors can lose 100% of their investment.
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
