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Income Traders Could Pick Up Shares of This Cultural Icon at a 19% Discount
Few companies become the go-to phrase to describe a specific action. Google (NASDAQ: GOOG) is a prime example of an accepted term for Internet search. Another is TiVo (NASDAQ: TIVO) -- the act of recording television programs to watch at a more convenient time.
Time shifting has changed the way people watch TV as viewers do not have to work their schedule around networks anymore, and TiVo is the brand that started this revolution.
TIVO stock is nearly 70% above its 52-week lows, stalling out at $13.50 in February and May. As of this writing, TIVO is trading near $13.10. Major support sits just below the midpoint of the yearly trading range, at $10.60.
Selling put options could allow traders to collect income while they wait to get into TIVO at a 19% discount.
Cash-Secured Put Selling Strategy
While the typical investor might use a limit order to buy a stock or ETF at a designated price or lower, the options trader can do one better by selling a cash-secured put.
This strategy has the same mathematical risk profile as a covered call. With put selling, there is an obligation to buy the stock at the strike price if it is assigned, allowing you to get into the stock at a discount. In fact, the true entry cost basis is even lower with the subtraction of the premium you earned from selling the puts.
And if the stock is not below the strike price at expiration, then the premium received is all profit. In other words, you're getting paid not to own the stock.
There are two rules traders must follow to be successful at selling put options.
Rule One: Only sell puts on stocks you want to own.
The intention of this strategy is to be assigned the stock as a long-term investment (each option contract represents 100 shares). So make sure you have the funds in your account to buy the stock at the options strike price if a sell-off occurs. Paying in full ensures that no additional money is needed to hold the stock for potentially many months or even years until a price recovery.
Rule Two: Sell either of the front two option expiration months to take advantage of time decay.
Collect premium every month on put sales until you are assigned shares at a cost-reduced basis. Every month that you keep the premium is money subtracted from your entry price.
Recommended Trade Setup: Sell to open TIVO June 11 Puts at $0.40 or better.
This cash-secured put sale would assign long shares at $10.60 ($11 strike minus $0.40 premium), which is about 19% below TIVO's current price, costing you $1,060 per option sold. If the options expire worthless, you keep the $40 premium, earning a potential 3.8% return on risk in less than a month.
But remember, you should only sell this put if you want to own TIVO stock at a discount to the current price. If you are assigned the shares, a July covered call can be sold against the stock to lower your cost basis even further.
If the stock does not fall below the strike price before expiration, then you keep the premium you collected, essentially getting paid not to buy the stock.
For more analysis on TIVO, see the video below (starting at 2:17):