How To Buy WBA Stock For An 9% Discount Or Achieve A 24% Annual Return

Selling cash secured puts on stocks an investor is happy to take ownership of is a great way to generate some extra income. 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 100 shares at the strike price.

Why Trade Cash Secured Puts?

Selling cash secured puts is a bullish trade but slightly less bullish than outright stock ownership. If the investor was strongly bullish, they would prefer to look at strategies like a long call, a bull call spread, or a poor man’s covered call. Investors would sell a put on a stock they think will stay flat, rise slightly, or at worst not drop too much.

Cash secured put sellers set aside enough capital to purchase the shares and are happy to take ownership of the stock if called upon to do so by the put buyer. Naked put sellers, on the other hand, have no intention of taking ownership of the stock and are purely looking to generate premium from option selling strategies.

The more bullish the cash secure put investor is, the closer they should sell the put to the current stock price. This will generate the most amount of premium and also increase the chances of the put being assigned. Selling deep-out-of-the-money puts generates the smallest amount of premium and is less likely to see the put assigned.

WBA Cash Secure Put Example

On Friday, with Walgreens (WBA) trading at $37.36, the February put option with a strike price of 35 was trading around $1.02. Traders selling this put would receive $102 in option premium. In return for receiving this premium, they have an obligation to buy 100 shares of WBA for $35. By February 17, if WBA is trading for $30, or $25, or even $10, the put seller still has to buy 100 shares at $35.

But, if WBA is trading above $35, the put option expires worthless, and the trader keeps the $102 option premium. The net capital at risk is equal to the strike price of 35, less the 1.02 in option premium. So, if assigned, the net cost basis will be $33.98. That’s not bad for a stock currently trading at $37.36. That’s a 9.29% discount from the price it was trading on Friday.

If WBA stays above $35, the return on capital is:

$102 / $3,398 = 3.00% in 45 days, which works out to 23.82% annualized.

Either the put seller achieves a 23.82% annualized return or gets to buy a blue chip stock for an 9% discount. You can find other ideas like this using the Naked Put Screener. 

Company Details

The Barchart Technical Opinion rating is a 24% Sell with a weakening short term outlook on maintaining the current direction. 

Of 15 analysts covering WBA, 3 have a Strong Buy rating, 10 have a Hold rating, 1 has a Moderate Sell rating and 1 has a Strong Sell rating.

Implied volatility is currently 35.45% compared to a 12-month high of 48.93% and a low of 22.24%. The IV Percentile is 81% and the IV Rank is 49.50.

Walgreens Boots Alliance, Inc. operates as a retail drugstore chain. The Company sells prescription and non-prescription drugs, as well as general merchandise products, including household items, convenience and fresh foods, personal care, beauty care, photofinishing and candy. Its pharmacy, health and wellness services include retail, specialty, infusion and respiratory services, mail service and convenient care clinics. The Company offers its products and services through drugstores, as well as through mail, by telephone and online. Walgreens Boots Alliance, Inc., is based in Deerfield, Illinois.

Summary

While this type of strategy requires a lot of capital, it is a great way to generate an income from stocks you want to own. If you end up being assigned, you can start selling covered calls against the stock holding. You can do this on other stocks as well, but remember to start small until you understand a bit more about how this all works.

Risk averse traders might consider buying an out-of-the-money put to protect the downside. 

If you have any questions, feel free to reach out to me by email or on Twitter. Please 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.

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