Investment Reflection: Cash Secured Put Option on Barrick Gold
Overview
On May 23, 2024, I executed a cash-secured put option on Barrick Gold$Barrick Gold Corp(GOLD)$ , selling one contract with a strike price of USD 17, maturing on June 21, 2024. The premium received for this option was USD 41. This investment strategy was chosen based on the promising trends exhibited by Barrick Gold, particularly its ability to reinvest in the business and generate higher returns on capital employed.
Rationale Behind the Investment Strategy
Reinvestment and Returns on Capital Employed:
Barrick Gold has demonstrated a commendable capacity to reinvest its earnings into the business effectively, yielding higher returns on capital employed. This trend suggests strong management and a sustainable business model, which are critical factors for long-term success and stability.
Stock Performance:
Over the past five years, Barrick Gold's stock has delivered a solid 69% return to shareholders. This significant appreciation reflects investor confidence and recognition of the company's strategic improvements and operational efficiency.
Market Sentiment and Valuation:
Given the positive market sentiment and the company's strong performance, selling a cash-secured put option was a strategic choice. The strike price of USD 17 was set considering the stock’s historical performance and future prospects. By selling the put option, I anticipated that the stock would remain above this level, allowing me to retain the premium without having to purchase the stock.
Outcome and Insights
Premium Income:
The immediate benefit of this strategy was the premium income of USD 41. This amount represents a guaranteed return regardless of the stock's performance, provided the option expires worthless.
Risk Management:
A cash-secured put option involves holding enough cash to buy the stock if the option is exercised. This strategy mitigates risk by ensuring I have the capital to purchase the stock at the strike price if necessary. In this case, the strike price of USD 17 was chosen based on the stock’s past performance and the belief in its continued upward trend.
Potential Scenarios:
1. Stock Above Strike Price (USD 17) at Expiration:
If Barrick Gold’s stock price remains above USD 17 at expiration, the option will expire worthless. I will retain the USD 41 premium without having to purchase the stock, resulting in a net gain from the premium.
2. Stock Below Strike Price at Expiration:
If the stock price falls below USD 17, I will be obligated to purchase the stock at the strike price. However, this would still be a favorable outcome as I would acquire a fundamentally strong company at a discounted price, effectively reducing my cost basis by the premium received (USD 41).
Conclusion
The decision to sell a cash-secured put option on Barrick Gold was informed by the company's strong financial performance and promising trends. The premium received provided immediate income, while the cash-secured nature of the option ensured risk management. Regardless of the stock's movement, the strategy offers a favorable risk-reward balance, either through premium retention or acquiring a quality stock at an attractive price. This reflection confirms the strategy's effectiveness in capitalizing on Barrick Gold’s positive outlook while managing potential downsides.
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