Uber Technologies stock has pulled back in recent weeks, which could provide long-term investors a good entry point. For those traders worried about paying too much for Uber stock, a cash-secured put could be an attractive way to potentially buy shares at a discount.
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 see the put expire worthless and keep the premium, or have it assigned and acquire the stock below the current price.
It's also important that anyone selling puts understands they may be assigned a contract of 100 shares at the strike price.
Let's take a look at how a cash-secured put trade might look for Uber Technologies.
A Cash-Secured Put On Uber Stock
Assume you're happy to buy 100 shares of Uber Technologies stock at a price of 80 any time between now and Sept. 19. Selling a Sept. 19-strike put at 80 would generate around $200 in premium. The put seller would have the obligation to purchase 100 shares of Uber stock at 80 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 78, or 11% below Wednesday's closing price.
If the stock stays above 80 at expiration, the put ends up worthless. That leaves the trader with a 2.56% return on capital at risk. It also works out to around 18.35% 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 the loss gets partially offset by the premium received for selling the put.
The maximum loss on the trade comes if Uber stock falls to zero. At that point, the trade loses $7,800, but most investors cut their losses before then.
Reduced Cost Base For Investor
Cash-secured puts are a fantastic way to generate a high return on stocks the investor is happy to own. If the put gets assigned, investors take ownership with a reduced cost basis. Then they can begin selling covered calls to generate additional income from the position.
According to IBD Stock Checkup, Uber Technologies stock ranks No. 6 in its group. Further, Investor's Business Daily gives it Composite Rating of 94 out of a best-possible 99, an Earnings Per Share Rating of 82 and a Relative Strength Rating of 82.
Uber plans to announce second-quarter results on Aug. 6, so earnings risk accompanies this trade.
It's important to remember that options are risky and investors can lose 100% of their investment.
Gavin McMaster is founder and operator of Options Trading IQ, a website offering instruction on how to buy and sell options. Follow him on X/Twitter at @OptiontradinIQ.
