Looking back to 67 days ago, Diamondback Energy, Inc. (FANG) priced a 3,000,000 share secondary stock offering at $62.67 per share. Buyers in that offering made a considerable investment into the company, expecting that their investment would go up over the course of time and based on early trading on Monday, the stock is now 11.2% higher than the offering price.
Investors who did not participate in the offering but would be a buyer of FANG at a cheaper price, might benefit from considering selling puts among the alternative strategies at their disposal. One interesting put contract in particular, is the January 2016 put at the $50 strike, which has a bid at the time of this writing of $5.80. That would result in a cost basis of $44.20 per share before broker commissions in the scenario where the contract is exercised. If the contract is never exercised, the put seller would still keep the premium, which represents a 11.6% return against the $50.00 purchase commitment, or a 6.8% annualized rate of return (at Stock Options Channel we call this the YieldBoost).
Secondaries can often present buying opportunities for bullish investors interested in purchasing shares, because the sudden extra supply of stock tends to require that the offering be priced at an attractive discount to where the stock had previously been trading before the offering announcement. That can also introduce near-term volatility which improves the premiums a put seller can achieve. Selling a put does not give an investor access to FANG's upside potential the way owning shares would, because the put seller only ends up owning shares in the scenario where the contract is exercised. The chart below shows the one year performance of FANG shares, versus its 200 day moving average: