How To Buy SLB Stock For A 12% Discount
As oil stocks look like they could make another run, Schlumberger (SLB) is on the list of possible start-ups. According to the IBD Stock Checkup, SLB stock currently has a Composite Rating of 97, an EPS Rating of 79 and a Relative Strength Rating of 95.
But you may want to buy SLB stock at a lower price. By using a cash-backed put, you could get these stocks at a discount with less risk.
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Buy stocks at a discount with an options trade
A cash-backed put is a slightly less bullish trade than buying the stock outright. It is considered a neutral to slightly bullish trade.
It starts with writing or selling an at-the-money or out-of-the-money put option. In this example we are looking at SLB shares. At the same time, you set aside enough money to buy the stock at your chosen strike price.
You win in two ways. Either the put expires worthless and you keep the premium, or you are allotted the shares and buy the shares below the current price.
Selling put options is an easy place for investors to get started with options. They’re like a covert call and pretty easy to understand once you know the basics.
Traders selling puts should be prepared to buy 100 shares at the strike price if allotted.
Setting up trading in SLB shares
With SLB stock trading at 42.86 yesterday, investors were able to sell a December put with a 40 strike price for around $2.20.
An investor who sells this put receives $220 in his account. They can keep that.
If SLB stock stays above 40 by Dec. 16, the put expires worthless, allowing the trader to pocket that premium for a 5.8% return on investment in just a few months. That’s 35.41% annualized.
But what if SLB falls back below 40 by expiry? Then, as the put seller, you are obligated to buy 100 SLB shares at 40%. However, due to the $2.20 premium received, the net effective cost of the position would be $37.80 per share. That’s 11.8% below yesterday’s close.
risks and rewards
The main risk involved in trading is similar to direct stock ownership. If SLB stock falls rapidly, the trade will suffer a loss. Once you’re allotted SLB stock, go down with it if the stock falls. However, the premium received for selling the options will help offset the stock’s loss slightly.
The maximum loss from the trade occurs when SLB stock falls to $0. It’s unlikely. But even in this worst-case scenario, trading is still risk-defined. You lose $3,780 at most, but most traders would cut losses long before that.
A stop loss could be implemented if SLB stock falls below 38.
Cash backed puts are a great way to earn a return on strong stocks, potentially without ever having to own it.
If the put is allocated, the investor takes ownership at a reduced cost basis. Also, you may be able to start selling covered calls against the SLB stock position to generate additional income.
Please remember that options are risky and investors can lose 100% of their investment. This article is for educational purposes only and is not a trading recommendation. Remember to always do your own due diligence and consult your financial adviser before making any investment decisions.
Gavin McMaster holds a Masters in Applied Finance and Investment. Specializing in income options trading, he is very conservative in his style and believes that patience while waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ.
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