Late to the AI Stock Party? No Problem. Try This Put Option Trade

Selling cash secured puts on stocks an investor is happy to take ownership of is a great way to generate some extra income. 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 that they may be assigned 100 shares at the strike price.

Why Trade Cash Secured Puts?

Selling cash secured puts is a bullish trade but slightly less bullish than outright stock ownership. If the investor was strongly bullish, they would prefer to look at strategies like a long call or a bull call spread. Investors would sell a put on a stock they think will stay flat, rise slightly, or at worst not drop too much.

Cash secured put sellers set aside enough capital to purchase the shares and are happy to take ownership of the stock if called upon to do so by the put buyer. Naked put sellers, on the other hand, have no intention of taking ownership of the stock and are purely looking to generate premium from option selling strategies.

The more bullish the cash secure put investor is, the closer they should sell the put to the current stock price. This will generate the most amount of premium and also increase the chances of the put being assigned. Selling deep-out-of-the-money puts generates the smallest amount of premium and is less likely to see the put assigned.

AI Stock Cash Secure Put Example

Yesterday, with AI trading at 42.84, the August 18 put option with a strike price of 40 was trading around $6.85. Traders selling this put would receive $685 in option premium. In return for receiving this premium, they have an obligation to buy 100 shares of AI for $40. By July 21, if AI is trading for $35, or $30, or even $10, the put seller still has to buy 100 shares at $40.

But, if AI is trading above $40, the put option expires worthless, and the trader keeps the $685 option premium. The net capital at risk is equal to the strike price of 40, less the 6.85 in option premium. So, if assigned, the net cost basis will be $33.15. That’s not bad for a stock currently trading at $42.84. That’s a 22.62% discount from the price it was trading yesterday.

If AI stays above $40, the return on capital is:

$685 / $3,315 = 20.66% in 64 days, which works out to 116% annualized.

Either the put seller achieves a 116% annualized return or gets to buy the stock for a 20.66% discount. 

This is a high risk trade and should only be considered if you believe in the long term prospects of AI stock.

Company Details

The Barchart Technical Opinion rating is a 100% Buy with a strongest short term outlook on maintaining the current direction.

Of 12 analysts covering AI stock, 2 have a Strong Buy rating, 6 have a Hold rating, 2 have a Moderate Sell rating and 2 have a Strong Sell rating.

C3.ai Inc. is an enterprise AI software provider for accelerating digital transformation. 

C3.ai delivers the C3 AI Suite for developing, deploying and operating large-scale AI, predictive analytics and IoT applications. 

The core of the C3.ai offering is a proprietary, model-driven AI architecture which enhances data science and application development. C3.ai is based in Redwood City, United States.

Summary

Selling puts can be a fantastic way to generate income and / or acquire a stock at a lower price.

When traders sell put options and those options get assigned, they have the opportunity to write  covered calls. 

This strategy involves selling a call option against the 100 shares of stock they own, which are now acting as collateral. 

By selling puts and calls, traders can potentially generate significant option premium from the one stock position.

Risk averse traders might consider buying an out-of-the-money put to protect the downside. 

Please 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.

On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.