SoFi Technologies (SOFI) is a highly-rated stock with high implied volatility. That translates to high option premiums.
For traders wanting to take advantage of the high volatility on SoFi stock, a cash-secured put offers an attractive way to potentially buy the stock for a discount or get some income.
Cash-Secured Put On SoFi Stock
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.
Additionally, the goal is to either have the put expire worthless and keep the premium, or get assigned and acquire the stock below the current price.
However, it’s important that anyone selling puts understands that they may have to buy 100 shares at the strike price.
A number of financial stocks were down in early trading Tuesday, including SoFi. But let’s assume we’re happy to buy 100 shares of SoFi stock at a price of 25 any time between now and Nov. 21. That’s a price just above the current price for its 50-day moving average line.
Meanwhile, selling a Nov. 21, 25-strike put generated around $218 in premium Tuesday morning. The put seller takes on the obligation to purchase 100 shares of SoFi Technologies stock at 25 if called upon to do so by the put buyer.
To calculate the break-even price for the trade, take the strike price less the premium. That gives a break-even price of 22.82, which is 12.3% below its price of 26.02 as of this writing.
Reward Vs. Risk
If the stock stays above 25 at expiry, the put expires worthless leaving the trader with a 9.6% return on capital at risk. That works out to around 66% on an annualized basis.
The main risk with the trade is similar to outright stock ownership. If the stock falls sharply, the trade will suffer a loss. However, the loss is partially offset by the premium from selling the put.
The maximum loss on the trade occurs in the unlikely event that SoFi falls to $0. That sees a loss of $2,282 but most traders would cut their losses long before then.
Cash-secured puts are a fantastic way to generate a high return on stocks the investor is happy to own. If the investor gets assigned the put, they take ownership with a reduced cost base. That opens the door to potentially begin selling covered calls to generate additional income from the position.
Getting An Entry On A Highly Rated Stock
Investor’s Business Daily gives SoFi stock a Composite Rating of 99 out of a best-possible 99, an Earnings Per Share Rating of 80 and a Relative Strength Rating of 97. According to IBD Stock Checkup, SoFi ranks first in its group.
SoFi Technologies will likely announce Q3 earnings in late October, so there would be earnings risk with this trade.
Always remember that options are risky. 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 is founder and operator of Options Trading IQ, which offers instruction on how to buy and sell options. Follow him on X/Twitter at @OptiontradinIQ.
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