Astera Labs (ALAB) continued to soar as the stock is on track for its fourth straight big monthly gain.
As a recent IPO stock, implied volatility is very high, which means juicy options premiums.
Implied volatility is currently at 73%, much higher than other AI stocks such as Nvidia (NVDA), which is sitting at 38%.
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What Is A Cash-Secured Put?
Astera Labs specializes in connectivity solutions for artificial intelligence and cloud data-centers.
In the September-ended quarter, the company reported adjusted earnings of 23 cents per share on $113.1 million in sales. That’s a 206% revenue increase year-over-year, surpassing analyst expectations.
Following these results, Astera Labs surged about 30%, reflecting strong investor confidence.
Astera Labs’ product launches, including the Scorpio Smart Fabric Switch portfolio, position it as a notable player in the AI-chip industry.
Setting Up Cash-Secured Put Trade
One way to take ownership of a stock for less than the current price is via a cash secured put option.
Let’s take a look at how a cash secured put trade might look with Astera Labs.
A cash-secured put involves writing an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock.
The goal is to have the put expire worthless and keep the premium. Or, you can be assigned shares and acquire the stock below the current price.
It’s important that anyone selling puts understands they may be assigned 100 shares at the strike price.
Let’s assume we’re happy to buy 100 shares of Astera Labs at 135 any time between now and Jan. 17.
Trade Generates $675 Up Front
Selling a Jan. 17, 135-strike put would generate around $675 in premium. The put seller would have the obligation to purchase 100 shares of Astera Labs at 135 if called upon to do so by the put buyer.
The breakeven price for the trade is calculated by taking the strike price less the premium received. In this case, that’s 128.25. And that’s more than 9% below Tuesday’s closing price.
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If the stock stays above 135 at expiry, the put expires worthless. That leaves the trader with a strong 5.26% return on capital at risk. That works out to around 83% on an annualized basis.
The main risk with the trade is similar to outright stock ownership: If the stock falls sharply, the trade will suffer a loss. However, the premium received from selling the put will partially offset the loss.
The maximum loss on the trade would occur if Astera Labs falls to zero, which would see the trade lose $12,825. But most traders would cut their losses before then.
Cash secured puts are a fantastic way to generate a nice return on stocks the trader is happy to own.
Traders May Sell Calls On Shares
If the put does get assigned, the investor takes ownership with a reduced cost base. Traders can potentially begin selling covered calls to generate additional income from the position.
According to the IBD Stock Checkup, Astera Labs is ranked No. 3 in its industry group. It has a Composite Rating of 97, an EPS Rating of 81 and a Relative Strength Rating of 98.
It’s important to remember that options are risky and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
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