Anheuser-Busch (BUD) stock closed at its highest point yesterday and is now trading above its 50-day moving average. For investors looking to potentially buy BUD stock at a discount, a strategy called a cash-secured put may be worth considering.
A cash-secured put involves selling an at-the-money or out-of-the-money put option while setting aside enough cash to purchase the stock if needed. The goal is either for the put option to expire worthless, allowing the investor to keep the premium, or to take assignment and acquire the stock below its current price.
Selling put options, such as a cash-secured put, is a good strategy for option investors. It is similar to a covered call and relatively easy to understand. However, it’s important to note that selling the put means you may be assigned 100 shares of the stock, in this case, BUD stock, at the strike price.
To illustrate this strategy, let’s use the current scenario with BUD stock trading at $57.50. An investor could sell a November 17 put with a strike price of $55 for around $0.95. By selling this put, the investor would receive $95 into their account, which they would keep.
If BUD stock falls below $55 by November 17, the put seller would have the obligation to purchase 100 shares of BUD stock at $55 if called upon to do so by the put buyer. Therefore, $5,500 would need to be set aside as cash to secure the short put position.
Considering the option premium received, the net cost of the shares would be $54.05, effectively providing a 6% discount to the current price for acquiring 100 shares of BUD stock.
If BUD stock remains above $55 at expiry, the put option would expire worthless, and the entire premium would be kept by the trader. This would result in a 1.8% return on capital at risk in 59 days, which equates to around 10% per annum.
The main risk with this trade, similar to outright stock ownership, is that if BUD stock significantly falls, the trade would suffer a loss. However, the premium received for selling the put would help partially offset the loss.
It’s important to note that options are risky, and investors can lose 100% of their investment. This article is for educational purposes only and not a trade recommendation. Always do your own due diligence and consult with a financial advisor before making any investment decisions.
Source: This article is based on information from IBD Stock Checkup, which ranks BUD stock as No. 8 in its group and has a Composite Rating of 58, an EPS Rating of 48, and a Relative Strength Rating of 53.
Definition:
– Cash-Secured Put: A strategy in options trading where an investor sells an at-the-money or out-of-the-money put option while setting aside enough cash to purchase the stock if needed.
Source:
– IBD Stock Checkup.