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Under $10 Stock Could Yield an Instant 3.9% Ahead of a Rebound
Groupon (NADAQ: GRPN) has had a tough run since its 2011 IPO. The downslide accelerated in 2012 when GRPN failed at the $8 level. That became a technical pivot in 2013, when the stock broke out from that level and never looked back.
GRPN is up nearly 130% from its 52-week low, which was made almost exactly a year ago on Dec. 10, 2012. After hitting a peak at $12.76 on Sept. 19, GRPN has backed off with support below at $8.50, the midpoint of the 52-week trading range, and at the $8 level, which is the pivot point from the July 2012 breakdown and June 2013 breakout.
If you are comfortable holding on to this inexpensive stock for a potential recovery, then selling puts could allow you to collect income while you wait to get into GRPN at a 20% 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 option.
This strategy has the same mathematical risk profile as a covered call. When selling puts, there is an obligation to buy the stock at the option's 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 puts.
Rule One: Only sell put options on stocks you want to own.
The intention of the put selling 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 option's 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 each month from selling puts 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 GRPN Jan 8 Puts at $0.30 or better. (Use a limit order to get the desired price.)
This cash-secured put sale would assign long shares at $7.70 ($8 strike minus $0.30 premium), which is about 20% below GRPN's current price, costing you $770 per option sold. If the put option expires worthless, you keep the $30 premium, earning a potential 3.9% return in 39 days.
Remember, you should only sell this put option if you want to own GRPN at a discount to the current price.
If you are assigned the shares, a February covered call can be sold against the stock to lower your cost basis even further. If GRPN does not fall below the strike price before expiration, then you keep the premium you collected, essentially getting paid not to buy the stock.
Note: By using this same income-generating strategy, my colleague, Amber Hestla, has helped her Income Trader members earn $6,000... $19,500... even $150,000 this year alone. Click here to learn how you could do the same.