Stock Market Update: SoFi Technologies Sees a Surge in Implied Volatility
The stock market opened mixed today, with Lam Research and ASML Holdings leading the Nasdaq higher. Meanwhile, SoFi Technologies (SOFI) has caught the attention of investors with its high implied volatility, making it an attractive option for traders.
A Financial Services Powerhouse
SoFi is a financial services platform that offers a range of products, including student loan refinancing, personal loans, home loans, and credit cards. In the third quarter, the company reported net income of 5 cents per share and a 30% year-over-year revenue increase to $697 million, surpassing analyst expectations.
Implied Volatility Skyrockets
With fourth-quarter earnings set to be announced later this month, SoFi’s implied volatility has surged to 75%, giving it an IV percentile of 86%. This means that the current level of implied volatility is higher than 86% of all other readings in the last 12 months.
A Cash Secured Put Option Trade
One way to take advantage of SoFi’s high implied volatility is through a cash secured put option trade. This 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 either have the put expire worthless and keep the premium or to be assigned and acquire the stock below the current price.
Trade Example
Let’s assume we’re happy to buy 100 shares of SoFi at a price of $15 any time between now and January 31. Selling a January 31, 15-strike put would generate around $85 in premium. The breakeven price for the trade is calculated by taking the strike price less the premium received, giving a breakeven price of $14.15. That’s 8.77% below Wednesday’s closing price.
Potential Returns
If the stock stays above $15 at expiry, the put expires worthless, leaving the trader with an impressive 6.01% return on capital at risk. That works out to around 137% on an annualized basis.
Risks and Considerations
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 from selling the put will partially offset the loss. It’s essential to remember that options are risky, and investors can lose 100% of their investment.
SoFi’s Strong Fundamentals
According to the IBD Stock Checkup, SoFi is ranked No. 4 in its industry group, with a Composite Rating of 93, an EPS Rating of 81, and a Relative Strength Rating of 96.
Expert Insights
Gavin McMaster, a seasoned options trader with a Masters in Applied Finance and Investment, specializes in income trading using options. He believes that patience in waiting for the best setups is key to successful trading. Follow him on Twitter at @OptiontradinIQ for more insights and trading ideas.
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