Seagate Technology PLC (NASDAQ:STX) still is relevant in the new digital-heavy world. We now depend more on technology than ever. The cloud is the trend and I bet that STX will continue to carve its slice of the pie.
Fundamentally, STX it’s not outrageously expensive, but it does carry a premium to a lot of its competitors. Its profit levels are decent and it pays a respectable dividend. So it is a tolerable situation. Meaning I don’t see a bloated valuation. Furthermore, analyst are in a holding pattern with mostly “hold” recommendations. Chances of downgrades are minimal.
Technically, STX stock is in the middle of a two-year range, which means it is in balance. This is an opportunity to create income from predictable behavior and sell some downside risk against proven support.
Click to Enlarge I don’t like to chase price targets. We are in uncommitted markets, so buying shares at face value leaves too much to chance. Instead, I use options where I can increase my chances of success.
Most traditional investing starts with coin-flip odds. When selling options I can make my starting theoretical odds of success be closer to 90% than 50%.
Today’s thesis is simple. I don’t necessarily expect a giant rally in STX stock. And since I see a two-year bottom, I want to put that to work for me. I want to bet that Seagate stock will stay above $35 per share through August.
The Trade: Sell STX Aug $35 put and collect 70 cents per contract. Here I have a 90% theoretical chance of retaining my maximum gains. But if price falls below $35 then I own it and suffer losses below $34.30.
Usually, I like to sell opposing risk for balance, but in this case I will delay this. Markets are resilient and given the 15% price buffer, I’m confident that I will be able to manage my risk against short-term price gyrations.
I could opt to sell credit call spreads in Technology Select Sector SPDR Fund (NYSEARCA:XLK), but I feel that I would be opening myself up to potential headaches considering some of its holdings.
Selling naked puts is risky and definitely not suited to all investors. To moderate the trade I can turn it into a bull put spread instead. There the risk profile is limited, so it would require less margin.
The Alternate: Sell STX Aug $36/$35 credit put spread. Here I have about the same chance of success but with less risk. Yet the spread would still yield 20%. Compare this with buying the stock outright and without room for error then hope for a 20% rally to match the performance of the spread.
Selling options is risky business, so I never risk more than I can afford to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
