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Detroit-based Rocket Cos. (RKT) is best known for its flagship brand, Rocket Mortgage, the largest U.S. retail mortgage lender. Rocket stock also was added to Investor's Business Daily's SwingTrader portfolio on Monday.
For traders with a neutral to slightly bullish outlook on Rocket stock, a cash-secured put could be an attractive way to potentially buy the stock for a discount.
Here's how a cash-secured put trade might look on Rocket.
How The Cash-Secured Put Works
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 100 shares at the strike price. Let's assume we're happy to buy a 100-share contract in Rocket stock at a price of 20 any time between now and March 20.
Selling a March 20 put with a strike price of 20 generated around $236 in option premium. The put seller would have the obligation to purchase 100 shares of the Rocket Mortgage parent at 20 if called upon to do so by the put buyer.
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 17.64, or 12% below its trading price of around 20.07 this morning.
If the stock stays above 20 at expiry, the put expires worthless, leaving the trader with a 13.4% return on capital at risk. Further, that works out to around 45% on an annualized basis.
The main risk with the trade is similar to outright stock ownership. If the stock falls sharply, the trade also suffers a loss. But traders partially offset the loss via the premium received for selling the put.
The maximum loss on the trade would occur if Rocket stock fell to zero, which would see the trade lose $1,764. But most traders cut their losses beforehand.
Ratings For Rocket Mortgage Parent
Cash-secured puts are a fantastic way to generate a high return on stocks that the investor is happy to own.
With the assignment of the put, the investor takes ownership with a reduced cost base. It thus becomes possible to sell covered calls to generate additional income from the position.
Investor's Business Daily gives Rocket stock a Composite Rating of 78 out of a best-possible 99, an Earnings Per Share Rating of 15 and a Relative Strength Rating of 90. According to IBD Stock Checkup, Rocket ranks sixth in the Finance-Mortgage & Related Services industry group. The group holds 52nd place out of the 197 industries that IBD covers.
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.
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