Concentrating all of your nest egg in a narrow range of investment types can result in unnecessary risks. As such, we like to share income generating opportunities from a range of strategies. The option trade we share today generates a huge amount of upfront income and is based on an “Income via Growth” stock. The shares are very attractive over the long-term, but they just sold off thereby making this trade timely and compelling.
The Trade:
Sell Put Options on Roku (Roku) with a strike price of $120.00 (13.2% out of the money), and expiration date of December 20, 2019, and for a premium of approximately $2.60 (this comes out to a whopping 46.5% of extra income on an annualized basis, ($2.60/$120 x (17 out of 365 days)). This trade not only generates huge income for us now, but it gives us the possibility of owning shares of Roku at an even lower price if the shares fall even further than they already recently have, and they get put to us (and we’d be happy to own Roku, especially if it falls to a purchase price of $120.00 per share).
Your Opportunity:
We believe this is an attractive trade to place today and possibly tomorrow if the price of Roku doesn't move too dramatically before then, and as long as you’re able to generate annualized premium (income for selling, divided by strike price, annualized) of approximately 35% to 50%, or greater.
Our Thesis:
Our thesis is basically that Roku is an extraordinarily attractive “Income via Growth” stock, and because the shares just sold-off in volatile fashion—this exceptional opportunity exists. Roku is basically a widely unknown but extremely attractive player in the “streaming” content business (e.g. Netflix, Disney Plus, Hulu, Amazon, Apple TV). Roku is unique (and has incredible growth potential) because it is basically the operating system for smart TV’s that stream content such as Netflix, Disney Plus, Apple TV, and everyone else. Roku also has some of its own content, but its major value is that as other streaming content providers start to compete on price and become commodities, Roku will still benefit because all of that content will be streamed through Roku’s smart TV operating system platform. Smart TVs are very inexpensive these day relative to other smart devices, and more that 1/3 of all smart tv’s sold in the US already come with Roku installed as the operating system. This is extremely valuable because Roku gathers tons of data about the people watching TV, and this data is extremely valuable to advertisers. Advertisers will pay Roku big bucks (much in the same way advertisers pay Google and Facebook big bucks), and this makes Roku’s growth potentially truly enormous.
Share of Roku just sold off so dramatically yesterday for two main reasons. One, it’s a volatile stock that had experienced tremendous price appreciation over the last few weeks since its earning announcement. And two, a short-sighted Morgan Stanley analyst put out a bearish research report yesterday (plus the company filed to issue more shares). However, if you are looking for a good detailed long-term article on Roku’s business, be sure to check out this one:
Also important to note, the premium income available on this trade is currently much higher than normal because recent volatility has caused investor uncertainty and fearfulness to rise, and that’s when premium income available generally jumps higher.
Important Trade Considerations:
Two important considerations when selling put options are dividends and earnings announcements because they can both impact the price and thereby impact your trade. In this particular case, both are largely a non-issue. First, Roku doesn’t pay a dividend (it’s an “Income via Growth” stock). And with regards to earnings, Roku isn’t expected to announce earnings again until 2020, after this options contract expires. Had either of these events happened prior to this option trade’s expiration, we’d have to take a closer look at the potential impacts on the trade.
Conclusion:
Roku is not our typical “Income Investment,” but this trade is a very attractive income-generating opportunity, and if the shares were to get put to us—they’d go in our “Income Via Growth” portfolio. This trade is unique compared to our normal income-generating options trades because it’s not on a dividend-paying security (Roku pays no dividend), and because the premium income available is much higher. The premium income is much higher because Roku is a much more volatile stock (that’s why we’re placing this one +13% out of the money, instead of our typical range of 5% to 10% out of the money). And the shares have much more long-term price appreciation potential. We’d be happy if the shares fall to below $120 and the stock gets put to us (we’d hold in our Income via Growth portfolio for the long-term). And whether or not the shares get put to us, we get to keep the huge upfront premium income generated by this trade.