SoFi Technologies stock has become increasingly popular with retail traders and long-term investors alike due to its strong brand, expanding product offerings, and appeal to younger generations.
While SoFi has underperformed the general market, with its stock down around 13% year-to-date, the fundamentals and solid IBD ratings make this an attractive candidate for more risk-tolerant investors.
Reducing Risk Through A Covered Call Strategy
SoFi is a high-volatility stock, which means options premiums are also high. That can be great for covered-call traders looking to generate extra income for their SoFi stock position.
A covered-call strategy is one way to slightly reduce the risk on a long stock position while generating some premium. The catch is that upside is limited above the covered-call strike.
Let's look at how a covered-call trade on SoFi might take shape.
Buying 100 shares of SoFi cost around $1,340 Wednesday morning.
A Sept. 19, 15-strike call option traded around $1.20, generating $120 in premium per contract.
Selling the call option generates an income of 9.8% in under four months, equaling around 31.5% annualized.
If SoFi stock closes above 15 on the expiration date, the shares will be called away at 15, leaving the trader with a total profit of $280 (gain on the shares plus the $120 option premium received).
That equates to a 23.1% return, which is 73.8% on an annualized basis.
That's a very high return in anyone's book.
SoFi Stock Checkup
Of course, the risk with the trade is that the SoFi stock position might drop. As any stock position is subject to losses this is no different. Though the losses are partially offset by the gains made from selling the call.
Covered calls can be an effective strategy for generating income, managing downside risk, and reducing the effective purchase price of a stock.
According to the IBD Stock Checkup, SoFi stock is ranked No. 3 in its group and has a Composite Rating of 92, an EPS Rating of 81 and a Relative Strength Rating of 92.
SoFi Technologies is due to report earnings in late July or early August, so this trade has earnings exposure if held to expiration.
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 adviser 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.
