Get Paid While You Wait for a Recovery in This $5 Stock

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Groupon (Nasdaq: GRPN) has been hit hard during the past year, but a price bottom may have formed with extreme lows below $3 a share. As of this writing, Groupon is trading around $5.36 a share. The unfilled gap down in August from $6.35 to the52-week low at $2.60 has midpoint support at about $4.50 to lean on.

"Cheap" is a relative term, but with thedownside risk of zero and unlimitedupside potential, I'd say Grouponstock qualifies.

Due to volatility, another word for opportunity, the options on the stockoffer many strategies with mathematical advantages over a straight purchase of theshares . If you are comfortable holding on to this inexpensive stock to wait for a potential recovery, then sellingput options could allow you to collect income while you wait to get into the stock at a 16% discount.

Cash-Secured Put Selling Strategy
While the typical investor might use alimit order to buy a stock orexchange-traded fund ( ETF ) at a designated price or lower, the options trader can do one better by selling a cash-secured put.

This strategy has the same mathematical risk profile as acovered call . With put selling, there is anobligation to buy the stock at thestrike price if it is assigned, allowing you to get into the stock at a discount. In fact, the true entrycost basis is even lower with the subtraction of the premium you earned from selling theputs .

And if the stock is not below the strike price atexpiration , then the premium received is allprofit . In other words, you're getting paid not to own the stock.

There are two rules traders must follow to be successful at selling put options.

Rule One: Only sell puts onstocks you want to own.

The intention of this strategy is to be assigned the stock as a long-terminvestment (eachoption contract represents 100 shares). So make sure you have thefunds in your account to buy the stock at the options strike price if a sell-off occurs. Paying in full ensures that no additionalmoney is needed to hold the stock for potentially many months or even years until a price recovery.

Rule Two: Sell either of the front two option expiration months to take advantage of time decay.

Collect premium every month on put sales until you are assigned shares at a cost-reducedbasis . Every month that you keep the premium is money subtracted from your entry price.

Action to Take --> Sell to open GRPN March 5 Puts at 50 cents a share or better.

This cash-secured put sale would assign long shares at $4.50 ($5 strike minus $0.50 premium), which is about 16% below GRPN's current price, costing you $450 per option sold. Remember: Only sell this put if you want to own Groupon stock at a discount to the current price. If you are assigned the shares, an April covered call can be sold against the stock to lower your cost basis even further.

If the stock does not fall below the strike price before expiration, then you keep the premium you collected, essentially getting paid not to buy the stock.

This article originally appeared on ProfitableTrading.com:
Get Paid While You Wait for a Recovery in This $5 Stock



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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This article appears in: Investing , Stocks

Referenced Stocks: ETF , GRPN

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