If You Like Okta, Better Like It With Options

This post was originally published on this site

MF3d

Thesis

Okta (NASDAQ:OKTA) is down over -30% today on the back of poor forward guidance. That brings the stock price to over -70% year to date and to a level not seen since January 2019! The tech bubble is deflating under our very own eyes, but a long term investor might want to start dabbling in the stock with a very long term holding window. For said investor we are going to outline an options based strategy that provides for a 10% discount to spot prices or to annualized yields exceeding 100% if the stock stabilizes.

Why implied volatility matters

When stocks sell-off substantially, that moves up the most important options pricing factor, namely volatility. A high implied volatility results in very rich options premiums. A retail investor does not need to be an options trading guru to understand that there are several ways to purchase a stock: i) outright in the market at spot levels, ii) via various options strategies (delayed purchase).

In this article we are going to describe a cash covered put strategy with a very short window which serves as a better way to enter a stock like OKTA which has seen such a steep sell-off as of late. The old adage “Do not catch a falling knife” is centered in our minds when looking at the OKTA chart. However, for long term investors who see value here we are outlining the fact that nobody can call a bottom accurately, and a covered put strategy provides for much better price entry points if the stock keeps sliding.

What is the trade?

We are putting forward a 1-month covered put options strategy that takes advantage of short end implied volatility that is exceeding 70% currently:

Options Chain (Market Chameleon)

Courtesy of Market Chameleon we can have a look above at the October 7, 2022 OKTA options chain. The trade we are proposing is to sell October 7 puts at a $65 strike for $6.75 per contract. Given OKTA’s spot price of roughly $62 as of the writing of this article, that given a retail investor a 10% discount to the current spot price if the trade is triggered (i.e. ultimate purchase price is $58.3).

What can happen?

Scenario 1

  • the OKTA price keeps sliding
  • on October 7 the OKTA price is below $65/share
  • the puts get triggered and the investor ends up long OKTA at $58.3/share versus the current spot price of $62/share

Scenario 2

  • the OKTA price stabilizes
  • the stock ends up trading above $65/share on October 7
  • the sold puts do not get triggered
  • the investor realizes the premium, which is $6.75 per contract
  • the premium obtained in 1 month is roughly 10% of the notional, and assuming it can be rolled at similar levels can result in annualized yields exceeding 100%

What to do if you are not familiar with options

If a retail investor has never traded options, they do not need to shy away. The takeaway here is that if you have $10,000 to invest in OKTA now, but are unsure if this a good entry point yet nonetheless you want to be long, you can now be aware that you can set that cash aside and write a put option on the name. The only calculation you need to thoroughly understand is around options contract sizes: 1 contract = 100 shares, so for 1 contract of OKTA shares at a $65 strike, one needs to set aside $6,500 in cash. Options contracts do not trade in fractional shares, hence you either do 1 contract or 2, or more in integer numbers.

Conclusion

OKTA is selling-off hard today on the back of poor guidance. Down more than -30% today and over -70% for the year the stock is looking like a falling knife. For a retail investor interested in the current levels for a long term holding period, we feel a cash covered put strategy is the ideal one to employ at this time. A 1-month $65 strike trade provides for a 10% discount to current spot levels and ensures a retail investor benefits from a better entry point by taking advantage of the stock’s high implied volatility.