Bullish on Red Hat (RHT)? Ways to Save on Your Investment Using Options
So maybe these bullish arguments sound good to you, but 100 shares of RHT currently run for about $3,100. RHT is currently trading at $30.95 and is challenging its 52-week high of $31.76.
Investors who have a similar outlook as UBS may want to hold a position in RHT but commit less capital. Alternatively, investors who disagree with UBS (and think RHT may soon be in decline mode) may want to place a bearish trade without taking on the risk of a short sale.
These are situations that may be assisted with options. Many options strategies require less capital up front and can assume a lower degree of risk. Below are just two potential options strategies – these are not buy-sell-hold recommendations, just examples of one trade for the RHT bulls and one for the skeptics.
*Prices given as of Tuesday afternoon
Bullish Option Strategy: Synthetic Long Stock (Split Strikes)
For investors who expect RHT to rally but do not wish to simply buy stock, a so-called “synthetic long stock” position (also known as a risk reversal) can be created for less capital by simultaneously buying calls and selling puts.
For example, the September 29 put can be sold for $1.74 and the September 31 call can be bought for $2.64, for an overall net debit of $0.90 (or $90 per lot). This compares to almost $3,100 needed to buy 100 RHT shares. In essence, the synthetic long stock strategy takes the proceeds from selling an out-of-the-money put to help fund the purchase of an out-of-the-money call.
At expiration, if RHT is trading between 29 and 31, the trader will suffer a maximum loss of $0.90. Below the 29 strike, the trader is vulnerable to losses all the way down to the zero mark. Above $31, however, gains are theoretically unlimited. At $33, for example, the long call would be worth $2 while the short put would be out-of-the-money and would expire worthless. The long call continues to gain in value as the stock rallies. Breakeven for this strategy is $31.90, or the long call plus the premium paid for the spread.
Note: this trade will have margin requirements due to the naked (uncovered put). Typically, margin is the greater of two calculations: 20% of the stock price (less the amount by which the put is out-of-the-money) or 10% of the strike price plus the premium received from the put sale.
Bearish Option Strategy: Bear Put Spread
The June 32.5/31 bear put spread is currently priced for a net debit of $0.88 (buying the 32.5 put and selling the 31 put). The spread buyer can lose 100% of this debit if RHT is trading above $32.50 at June expiration. Alternatively, the maximum potential profit of $0.62 is achieved if RHT is still below $31 at expiration. Since these put strikes are in the money, RHT doesn’t necessarily need to decline to make this strategy profitable; it just needs to not move higher. Breakeven for this strategy is $31.62, or the long put minus the debit paid.
Are you a Red Hat fan?
Are you in the same camp as the folks at UBS or do you think RHT will be unable to reach another new high anytime soon? Would you trade RHT right now and if so, what kind of strategy would you try?
Compare OptionsHouse rates for stock options with other brokers. For investors who are new to options and still trying to get your feet wet, practice trades without the risk in a virtual trading account.
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