Gilead Sciences (GILD) is back in oversold territory as the stock retests the October low around 56.
While it is not currently a highly rated stock, contrarian investors could look to take a long-term position at bargain basement prices.
Today I’ll share with you an options strategy that will allow you to buy GILD stock at a roughly 7% discount from yesterday’s price.
The strategy is known as a cash-secured put.
Cash-Secured Put Strategy On GILD
A cash-secured put involves writing (selling) an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock at that strike price.
Meanwhile, the goal is to either have the put expire worthless and keep the premium, or to be assigned and acquire the stock below the current price.
It’s important that anyone selling puts understands that they may be assigned 100 shares at the strike price.
Additionally, for GILD stock a trader selling the March 19th 55 strike put could generate around $240 in premium per contract.
Conservative traders may prefer to wait to see if they can sell that contract at a slightly higher price to give the trade a bit of extra juice.
Cash Secured Puts Can Allow You To Buy Stock At A Discount
The put seller would have the obligation to purchase 100 shares of GILD stock at 55 if called upon to do so by the put buyer.
The break-even price for the trade can be calculated by taking the strike price less the premium received, which in this case gives a break-even price of 52.60.
That’s a 7.54% discount to yesterday’s closing price.
The maximum loss on the trade would occur if GILD stock fell all the way to $0 which would see the trade lose $5,260.
If the stock stays above 55 at expiry, the put expires worthless leaving the trader with a healthy 4.36% return on capital-at-risk in three months.
This is calculated by dividing the $240 premium received by the $5,260 capital-at-risk.
The main risk with the trade is similar to outright stock ownership. If the stock falls precipitously, the trade will suffer a loss. However the loss will be partially offset by the premium received for selling the put.
Cash secured puts are a fantastic way to generate a nice return on stocks the trader is happy to own.
Key Ratings To Take Into Account
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 Twitter at @OptiontradinIQ
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