StoneCo stock has gained 49% in the last three months and is now roughly 5% below its 52-week high. One way to take ownership of stocks like StoneCo for less than the current price is through a cash-secured put option trade.
Based in Brazil, StoneCo provides financial technology solutions for merchants and integrated partners.
As a stock showing market leadership, StoneCo recently received an upgrade for its Relative Strength Rating to 93 from 90 by Investor's Business Daily. Impressive price action and diversification benefits can make this stock attractive for investors looking for exposure to up and coming stocks.
Let's take a look at how a cash-secured put trade might look on StoneCo stock. 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. Also, it's important that anyone selling puts understands that they may be assigned 100 shares at the strike price.
How To Do A Secured Put Trade
Let's assume we're happy to buy 100 shares of StoneCo stock at a price of 13 any time between now and Oct. 17. That's right around the current level of its 50-day moving average line. Selling an Oct. 17 strike put at 13 would generate around $90 in premium. The put seller has the obligation to purchase 100 shares of StoneCo stock at 13 if called upon to do so by the put buyer.
Traders calculate the break-even price by taking the strike price less the premium received. That gives a break-even price of 12.10, which is 15% below its price of 14.36 as of Wednesday morning.
If the stock stays above 13 at expiry, the put expires worthless leaving the trader with a 7.4% return on capital at risk. Meanwhile, that works out to around 23% on an annualized basis.
The main risk with the trade is similar to outright stock ownership. If the stock falls sharply, the trade will suffer a loss. However, the premium received for selling the put partially offsets the loss.
The maximum loss on the trade occurs in the unlikely event that StoneCo stock falls to zero, resulting in a $1,210 loss. Of course, most investors would institute a stop loss long before that.
Cash secured puts are a fantastic way to generate a nice return on stocks the trader is happy to own. If the put does get assigned, the investor takes ownership with a reduced cost base. The trader then can potentially begin selling covered calls to generate additional income from the position.
StoneCo Stock Rankings
According to IBD Stock Checkup, StoneCo stock ranks sixth in its group. Along with its 93 RS Rating, it has a Composite Rating of 95 and an Earnings Per Share Rating of 86. An ideal score for all ratings is 99.
StoneCo has reported first-quarter earnings, but another earnings report is expected before the expiration so there is some earnings risk with this trade.
Further, our last cash-secured put trade on Bank of America has done well and looks like it might expire worthless for a full profit.
It's important to remember that options are risky and also that 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.
