Hey guys, I’m alerting you to an income trade I made this past Thursday.
While the majority of my investments are in high-quality dividend growth stocks, there is indeed a place in my portfolio for more speculative stocks that offer greater return potential and/or high income in the short term.
With this in mind, I just placed a bet on “gig economy” growth play Fiverr (FVRR).
At the time I placed my trade last Thursday, FVRR was selling for $232.62 per share and the August 20, 2021 $210 put options were going for $10.60 per share.
My trade involved selling one of these put options…
There are two probable ways this trade will work out…
Scenario 1: FVRR falls below $210 by August 20, 2021
If FVRR falls below $210 by August 20, I may be obligated to buy 100 shares at $210 per share… which is a $21,000 commitment.
In exchange for my agreement to that potential purchase obligation, I was paid an instant $1,060 (100 shares X $10.60 per share).
This money was immediately deposited into my 401(k) retirement account, where I made the trade.
Taking this income into consideration, my cost-basis on FVRR would drop to $199.40 per share.
That’s a 14.3% discount to the $232.62 share price that FVRR was selling for at the time I made this trade last Thursday.
Scenario 2: FVRR stays above $210 by August 20, 2021
If FVRR stays above $210 by August 20, the contract expires worthless and I get to keep the $1,060 in income.
This works out to a 5.0% return on what my purchase obligation would have been ($10.60 / $210) in 43 days.
If I can repeat these results over the period of a year I could generate a 42.9% yield from FVRR without even buying shares. The neat thing about this trade is that it makes money if the stock goes up… stays flat… or even drops as much as 14.3% by August 20.
P.S. When it comes to selling puts, I’ve developed a few rules that fit my portfolio objectives. I only sell a put option if:
- I want to own the underlying stock anyways
- I’ll be buying the stock at a reasonable price (which is typically fair value or better)
- The strike price of the option I’m selling is At-The-Money (ATM) or Out-of-The-Money (OTM)
- I’m comfortable owning the stock for the long-haul in case the price drops significantly below my strike price
- I’m comfortable “letting the stock get away from me” if I don’t get “put” shares and the stock takes off
- My position-sizing makes sense if I’m “put” the shares
- I can make the trade in a retirement account, such as an IRA or 401(k) to minimize taxes and tax paperwork.
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