Trade of the Day: Viacom (NASDAQ:VIAB)

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Viacom (NASDAQ:VIAB) shares fell by 9.4% to close at $34.99 during Monday’s session after it was reported that the company was no longer exploring a possible merger with CBS Corporation (NYSE:CBS).

Shari Redstone, who is the vice chair of the board for both VIAB and CBS, withdrew the merger proposal and now favors leaving Viacom as an independent entity. It was also announced yesterday that the former head of Viacom International Media Networks, Bob Bakish, will be the company’s new President and Chief Executive Officer.

At current levels, I don’t think the stock is going to go much lower, and I want to use this opportunity to collect some premium by selling puts on the name.

Sell to open the VIAB Jan. 20th $32.50 put at about $0.35.

This is a high risk trade, so take a small position.

For those who aren’t familiar with this strategy, the basic premise for a naked put write is to sell (also called “writing”) put options and thereby get income upfront in the form of the option premium.

By selling a naked put, you’re betting against the buyer of that put option, who thinks that the underlying stock is going down. If the buyer is wrong and the stock goes up, the put will expire worthless — so, as long as VIAB remains above $32.50 through expiration, you (as the seller) would have no other obligation and would simply walk away with 100% of the option premium you collect today.

Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.

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