Affirm Stock Reports Earnings Thursday; Why This Put Option Immediately Earns $235

Affirm (AFRM) reports earnings on Thursday after the close, and some analysts think the company might beat and raise. While shares have been performing poorly in the last few months, some traders may be willing to take a chance on Affirm stock at a much lower price than it was trading last year.

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Option traders are pricing in a potential 20% move in the price of Affirm stock over earnings. That means put and call options are very expensive at the moment due to the uncertainty around the earnings announcement.

One way to take ownership of a stock for less than the price is via an option strategy called a cash-secured put.

Affirm Stock: This Put Trade Lasts Until Feb. 18

A cash-secured put is a slightly less bullish trade than buying the stock. It is considered a neutral to slightly bullish trade.

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? Either let the put expire worthless and keep the premium, or get assigned and acquire the stock below the current price.

Selling put options is an easy place for investors to start with options. They are like a covered call and are pretty easy to understand once you know the basics.

Traders selling puts should understand that they may be assigned 100 shares at the strike price.

Let’s look at an example using AFRM. With Affirm stock trading at 65.25 Tuesday, investors could sell a Feb. 18-expiration put with a strike price of 52 for around $2.35.

An investor selling this put would receive $235 into their account, which would be theirs to keep. If AFRM falls below 52 by Feb. 18, they would be required to buy 100 shares at 52. The effective net cost of the position would be 49.65, thanks to the option premium received.

That is 23.9% below Tuesday’s closing price and slightly outside the expected move.

If the stock stays above 52 at expiry, the put expires worthless, leaving the trader with a 4.73% return on capital at risk.

That works out to be 192% annualized.

Risk Vs. Reward

The main risk with the trade in Affirm stock is similar to outright stock ownership. If the stock falls quickly, the trade will suffer a loss. However, the premium received will help to offset the loss.

The maximum loss on the trade would occur if AFRM fell to $0. That would see the trade lose $4,965, but most traders would cut losses long before then.

Cash-secured puts are a great way to generate a return on strong stocks, potentially without ever having to take ownership.

If the put does get assigned, the investor takes ownership with a reduced cost base and can potentially begin selling covered calls to generate additional income from the position.

Affirm stock fails to get high marks from IBD, with a Composite Rating of 16, an EPS Rating of 3 and a Relative Strength Rating of 19.

Please remember that options are risky, and investors can lose 100% of their investment.

Gavin McMaster has a masters in applied finance and investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ.

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