SoFi Technologies stock is experiencing a minor pullback in an otherwise solid uptrend. It's also a relatively high implied volatility stock, which means option premiums are bigger, and that can be great for option sellers.
For traders wanting to take advantage of the high volatility on SoFi stock, a cash-secured put could be an attractive way to potentially buy the stock for a discount.
As a reminder, 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 to be assigned and acquire the stock below the current price. It's important that anyone selling puts understands they may be assigned a contract of 100 shares at the strike price.
Here's how a cash-secured put trade might look on SoFi Technologies.
SoFi Stock: How The Trade Works
Let's assume we're happy to buy 100 shares of SoFi stock at a price of 23 any time between now and Oct. 17.
Selling an Oct. 17 put with a 23 strike price would generate around $122 in premium. The put seller would have the obligation to purchase 100 shares of SoFi at 23 if called upon to do so by the put buyer.
Calculate the break-even price for the trade by taking the strike price less the premium received. In this case, that gives a break-even price of 21.78, or 11.07% below Wednesday's closing price.
If the stock stays above 23 at expiration, the put expires worthless. That leaves the trader with a 5.6% return on capital at risk. That also works out to around 46% on an annualized basis.
The main risk with the trade is similar to outright stock ownership. If the stock falls sharply, the trade suffers a loss. But investors partially offset that loss via the premium received for selling the put.
The maximum loss on the trade would occur if SoFi Technologies stock fell to $0, which would see the trade lose $2,178. But most traders would cut their losses before then.
No Earnings Risk
Cash-secured puts are a fantastic way to generate a high return on stocks the investor is happy to own. If the put does get assigned, the investor takes ownership with a reduced cost base. The trader potentially can begin selling covered calls to generate additional income from the position.
According to IBD Stock Checkup, SoFi Technologies stock ranks first in its group. Further, Investor's Business Daily gives it a Composite Rating of 99, an EPS Rating of 80 and a Relative Strength Rating of 97.
SoFi already has announced second-quarter earnings, so there's no earnings risk with this trade.
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, and is conservative in his style. He also believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
