Strategic Cash-Secured Put Option Guide for CrowdStrike Investors

What is happening with CrowdStrike?

CrowdStrike continues to lead in AI-powered cybersecurity as it works towards a recovery following a corrupted update on 19 July that crashed millions of computers globally. Despite the substantial reputational impact due to the outage, investors have remained optimistic as CrowdStrike has since recovered more than half of the value it lost within just three months of the incident, partly aided by strong second quarter results.

Analysts are expecting the company to report third-quarter revenue of $982.36 million after the market closes on Tuesday. In addition to the July outage recovery, investors will also be closely monitoring new products and comments on customer spending.

However, concerns persist, particularly regarding Delta Airlines, one of the companies most severely impacted by the outage. Analysts suggest that if other affected companies decide to follow Delta Airlines in pursuing legal action, it could pose a continued risk to CrowdStrike shares.

What can you do?

Investors looking to increase their stake in CrowdStrike and wish to earn some income but feel that there could still be some downside in the short term may consider selling cash-secured put options. This strategy allows investors to potentially acquire CrowdStrike shares at a lower price while earning a premium. Investors must set aside the cash required to purchase the stock if the option is exercised.

Illustration:

1. With CrowdStrike’s stock price at $363.68 on 25 Nov 2024, selling a put option with a $330 strike price (if you are comfortable buying your CRWD shares at $330) for 1-month expiry (31 days) will yield a total premium of $695.00. ($6.95 x 100 shares).
2. This gives an annualized yield of 22.2% (6.95/363.38) x (360/31).
3. If CrowdStrike’s price stays above the strike price of $330 at expiry, the option will expire worthless, and the investor gets to keep the premium with no additional obligations.
4. If CrowdStrike’s price falls below the strike price of $330 at expiry, the investor is obligated to buy 100 shares at $330. The investor still gets to keep the option premium and owns the stock at a price that they were comfortable buying at.

Note:

1. Please note options trade in lot sizes of 100 shares. When an investor sells 1 lot of put option, they are selling a put option on 100 shares.
2. If the investor wishes to receive a higher premium, the investor could choose an option with a similar strike price and a longer expiry.
3. If the investor is only willing to buy the stock at a lower price but still want to receive a relatively similar premium, the investor could choose an option with a lower strike price and a longer expiry.

Advantages of Cash-Secured Puts

1. Generates passive income. Selling a cash secured put option generates an income via premiums that can supplement the overall return of a portfolio.
2. Recurring income. Investors can repeatedly sell cash secured puts on the same stock, generating recurring income as long as the stock stays above the strike price.

Risks of trading Cash-Secured Puts

1. Potential losses. If the stock price falls significantly below the strike price, investors may be obligated to buy the stock at a higher price than its then market value, minus the premium earned.
2. Early assignment. Investors may be assigned the stock before the expiration date, especially if the stock price falls significantly below the strike price. It is important to set aside adequate cash to take delivery of the stock at all times.
3. In the example above, it is possible that the stock falls well below $330 before the expiry but on expiry stays above $330. Without the option, the investor might have bought the stock below $330 but because of the cash-secured put option, the investor might miss out on the eventual upside of the stock.

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