Investors who are interested in buying shares of Cactus Inc (Symbol: WHD) but are cautious about paying the current market price of $51.04/share may consider selling put options as an alternative strategy. One particular put contract that is worth considering is the May 2024 put at the $40 strike, which has a bid of $1.75 at the moment. By collecting the premium from selling the put option, investors can earn a 4.4% return against the $40 commitment, or a 6.6% annualized rate of return.
It’s important to note that selling a put option does not give investors access to the potential upside of owning shares like actually buying the stock does. The put seller would only end up owning shares if the contract is exercised. Additionally, the person on the other side of the contract would only benefit from exercising at the $40 strike if it yielded a better outcome than selling at the current market price. Therefore, unless Cactus Inc’s shares decline by 22.1% and the contract is exercised, the only upside for the put seller is the premium collected for the 6.6% annualized rate of return.
It is worth considering that the annualized 6.6% rate of return from selling the put option exceeds the annualized dividend paid by Cactus Inc, which is 0.9% based on the current share price of $51.04. If an investor were to buy the stock at the market price in order to collect the dividend, there would be greater downside risk because the stock would have to decrease by 22.1% to reach the $40 strike price.
When discussing dividends, it’s important to remember that dividend amounts are not always predictable and tend to fluctuate based on a company’s profitability. To judge whether the most recent dividend is likely to continue and whether a 0.9% annualized dividend yield is reasonable to expect, investors can refer to the dividend history chart for Cactus Inc.
Below is a chart showing the trading history of Cactus Inc over the past twelve months, highlighting the $40 strike price relative to that history. This, along with fundamental analysis, can be useful in determining whether selling the May 2024 put option at the $40 strike for a 6.6% annualized rate of return provides a good reward for the risks involved.
The trailing twelve month volatility for Cactus Inc is calculated to be 45%, considering the last 250 trading day closing values and the current price of $51.04. For other put options contract ideas at different available expirations, investors can visit the WHD Stock Options page of StockOptionsChannel.com.
In mid-afternoon trading on Monday, the put volume among S&P 500 components was 2.06M contracts, while call volume was 2.30M, resulting in a put:call ratio of 0.90. This ratio is unusually high compared to the long-term median put:call ratio of 0.65, indicating that there are more put buyers in the options market today than would normally be seen.
For more information:
- Find out which 15 call and put options traders are talking about today
- Top YieldBoost Puts of the S&P 500
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.