Copyright Investor's Business Daily
Merck (MRK) is a defensive health care stock with a low beta that recently reclaimed its 200-day moving average after an extended downtrend. For traders with a neutral-to-slightly bullish outlook on Merck, a cash-secured put could be an attractive way to potentially buy shares for a discount. Let's take a look at how a cash-secured put trade might look for this drug giant. 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 have it 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. Generating Premium On Cash-Secured Put Let's assume we're happy to buy 100 shares of Merck stock at a price of 80 any time between now and Dec. 19. Selling a Dec. 19, 80-strike put would generate around $145 in premium. Meanwhile, the put seller is obligated to purchase 100 shares of Merck stock at 80 if called upon by the put buyer. Investors 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 78.55. That's also 7% below Wednesday's closing price. If the stock stays above 80 at expiration, the put expires worthless. Further, that leaves the trader with a 1.85% return on capital at risk. That works out to around 15.1% 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. However, investors partially offset that loss via the premium received for selling the put. The maximum loss on the trade occurs if Merck stock falls to zero. In that case, the trade loses $7,855. But most traders cut their losses before then. Merck Stock Ratings Cash-secured puts are a fantastic way to generate a high return on stocks the investor is happy to own. If the put is assigned, the investor takes ownership with a reduced cost basis. The investor then can potentially begin selling covered calls to generate additional income from the position. Merck has already announced third-quarter results, so there's no earnings risk with this trade. Investor's Business Daily gives Merck stock a Composite Rating of 64 out of a best-possible 99, an Earnings Per Share Rating of 70 and a Relative Strength Rating of 30. According to IBD Stock Checkup, Merck ranks eighth in the Medical-Ethical Drugs group, based on its Composite Rating. The group ranks 54th out of the 197 industries covered by IBD based on six-month price performance. 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. YOU MIGHT ALSO LIKE: Bitcoin Play Strategy A Candidate For A Bearish Trade As Its Stock Price Sags Here's A Potential Robinhood Stock Trade With Earnings On The Way With Boeing Stock Below Its 50-Day Line, Consider This Option Trade
