Oscar Health (OSCR) is a volatile stock, which translate to high option premiums. For traders wanting to take advantage of that high volatility with this health insurer, a cash-secured put could be an attractive way to potentially buy the stock at a discount.
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.
It’s important that anyone selling puts understands that they may be assigned a contract of 100 shares at the strike price.
Here’s how a cash-secured put trade might look on Oscar Health.
Making The Trade On Oscar Health Stock
Let’s assume we’re happy to buy 100 shares of Oscar Health stock at 17 a share any time between now and Oct. 17.
Selling an Oct. 17 put with a 17 strike price would generate around $110 in premium. The put seller would have the obligation to purchase 100 shares of Oscar Health stock at 17 if called upon to do so by the put buyer.
The break-even price for the trade can be calculated by taking the strike price, less the premium received. That gives a break-even price of 15.90, or 10.5% below Wednesday’s close.
If the stock stays above 17 at expiration, the put expires worthless leaving the trader with a 6.92% return on capital at risk. That works out to around 84% 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 is partially offset with the premium received for selling the put.
The maximum loss on the trade would occur if Oscar Health stock fell to zero. In that case, the trade loses $1,590, but most investors would likely cut their losses before then.
No Earnings Risk With Trade
Cash-secured puts are a fantastic way to generate a high return on stocks the investor is happy to own. If the put does get assigned, the investor takes ownership with a reduced cost base. Further, traders potentially can sell covered calls to generate additional income from the position.
Oscar Health has already announced second-quarter earnings, so there should be no earnings risk with this trade.
Investor’s Business Daily gives Oscar Health stock a Composite Rating of 50 out of a best-possible 99, an Earnings Per Share Rating of 27 and a Relative Strength Rating of 73. According to IBD Stock Checkup, Oscar Health also ranks 43rd in its group.
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:
Struggling NextEra Energy Makes A Good Candidate For This Bearish Option Trade
Option Sellers Have An Opportunity Awaiting Them With CoreWeave Stock
It Might Be Time To Take The Tesla Bull By The Horns With This Trade