Price Check: Make Albertsons Shares More Affordable With Cash-Secured Puts

Albertsons went public in June 2020 at an opening price of $15.50. Since its all-time high in September, ACI shares have lost more than 17%. Now, the stock is hovering at $28.20 with the current price supporting a dividend yield of 1.70%. The 52-week range has been $13.90 - $34.09, while its market capitalization stands at $13.17 billion.

Albertsons issued robust Q2 FY21 metrics on Oct. 18. Total sales hit $16.5 billion, up 4.7% year-over-year. Investors were pleased to see both digital sales jump 5% YoY and a hike in the quarterly dividend. Adjusted earnings came in at 64 cents per share, compared with 60 cents a year ago.

On the results, CEO Vivek Sankaran said:

“The favorable consumer backdrop together with our focus on in-store excellence, accelerating our digital and omni-channel capabilities, increasing productivity and strengthening our talent and culture [which] are driving increased identical sales and improved performance.”

Despite the recent decline in price, Wall Street is still bullish on Albertsons in the long run. According to 17 analysts with price forecasts, the 12-month median price target for the company's shares is $33.00 , implying a return of over 17.5%.

So today, we look at how bullish investors might consider selling cash-secured put options on ACI stock. Such a trade could especially appeal to those who want to receive premiums (from put selling) or to possibly own Albertsons shares for less than their current market price of $28.20.

We previously discussed the detailed mechanics of cash-secured put selling using Exxon Mobil stock. Readers who are new to put selling may want to consider reviewing that article.

Investors who write cash-secured puts are typically bullish on a stock during the timeframe that extends to the option expiry date. They generally want one of two things:

• Generate income (through the premium received by selling the put); or
• Own a particular stock, in spite of finding the current market price per share higher than what they would like to pay.

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A put option contract on Albertsons stock is the option to sell 100 shares. Cash-secured means the investor has enough money in his or her brokerage account to purchase the security if the stock price falls and the option is assigned. This cash reserve must remain in the account until the option position is closed, expires or the option is assigned, which means ownership has been transferred.

Let's assume an investor wants to buy ACI stock, but does not want to pay the full price of $28.20 per share. Instead, the investor would prefer buying the shares at a discount within the next several months.

One possibility would be to wait for Albertsons stock to fall further, which it might or might not do. The other possibility is to sell one contract of a cash-secured ACI put option.

So the trader would typically write an at-the-money (ATM) or an out-of-the-money (OTM) put option and simultaneously set aside enough cash to buy 100 shares of the stock.

Let's assume the trader is putting in this trade until the option expiry date of Jan. 21, 2022. As the stock is currently $28.20 at time of writing, an OTM put option would have a strike of $27.00. So the seller would have to buy 100 shares of Albertsons at the strike at $27.00 if the option buyer were to exercise the option to assign it to the seller.

The ACI 21 January 2022 27-strike put option is currently offered at a price (or premium) of $1.78.

An option buyer would have to pay $1.78 X 100, or $178, in premium to the option seller. This premium amount belongs to the option seller no matter what happens in the future. This put option will stop trading on Friday, Jan. 21.

Assuming a trader would enter this cash-secured put option trade at $28.20, at expiration on Jan. 21, 2022, the maximum return for the seller would be $178, excluding trading commissions and costs.

The seller's maximum gain is this premium amount if ACI stock closes above the strike price of $27.00. Should that happen, the option expires worthless.

If the put option is in the money (meaning the market price of Albertsons stock is lower than the strike price of $27.00) any time before or at expiration on Jan. 21, this put option can be assigned. The seller would then be obligated to buy 100 shares of ACI stock at the put option's strike price of $27.00 (i.e., at a total of $2,700).

The break-even point for our example is the strike price ($27.00) less the option premium received ($1.78), i.e., $25.22. This is the price at which the seller would start to incur a loss.

On a final note, the calculation of the maximum loss assumes the put seller was assigned the option and purchased 100 shares of Albertson at the strike price of $27.00. Then, in theory, the stock could fall to zero.

If the put seller gets assigned the option, the maximum risk is similar to that of stock ownership but partially offset by the premium (of $178) received.

Bottom Line

Cash-secured put selling is a moderately more conservative strategy than buying shares of a company outright at the current market price. This strategy can be a way to capitalize on the choppiness in ACI stock in the coming weeks.

Investors who end up owning Albertsons shares as a result of selling puts could further consider setting up covered calls to increase the potential returns on their shares. Thus, selling cash-secured puts could be regarded as the first step in stock ownership.

Written By: Investing.com