Option Trading Idea: Rambus (RMBS) Cash-Secured Put

Rambus (RMBS) has jumped more than 10% today to higher than $17.70 and touched a 52-week high of $19.94 earlier this week. The rally today is fueled by rumors floating of an imminent deal in which Samsung Electronics (KS) would buy the company for $25 to $27.50 per share. Feel like you missed out on the rally? Consider selling an out-of-the-money, cash-secured put.

More News On RMBS

• RMBS

• Closing Update: DJIA Manages Fourth Straight Positive Finish
  July 27, 2010
• Sector Update; Technology
  July 27, 2010
• Mid-Day Update: Stocks Move from Mixed to Lower as Street's Mood Dampens
  July 27, 2010

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Put selling can typically accomplish one of two things; the investor who sold the put either retains the premium collected at the time of the trade, banking a modest profit, or is able to acquire the underlying stock below the current market price (in this case, at the $17 level, minus the premium collected). It’s a way for a RMBS investor to acquire this impossible-to-borrow stock at a discounted rate. Time decay works in favor of investors who hope to simply keep the premium; this particular example has about six weeks until expiration.

Adding the cash-secured element means the investor is not left with an unwanted surprise if the put moves in-the-money. If you are forced to buy the shares, you’ll have capital available to do so.

RMBS Cash-Secured Put Trade Details:
*Sell and purchase prices derived from the bid and ask, respectively, at the time of publication.

RMBS shares are trading at $17.87.

Cash-Secured Put –

• Sell the RMBS October 17 put (out-of-the-money) at $1.60 per contract
• Net credit of $1.60 ($160)
• For every contract, set aside $1,540 in cash: [(17-1.60) * 100]

Profit/Loss Details:

The maximum potential profit for this strategy is the premium collected – $1.60 per contract – minus any commissions paid at the time of the trade’s execution. Remember that a cash-secured put that expires worthless will not require any commissions to "exit" the trade.

The maximum risk for this position is $15.40, or the strike price minus the credit taken in. With this and all other cash-secured put strategies, breakeven is also $15.40.

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