This Strategy Pays You 10.0% While Lining Up LRCX at Bargain Prices
At about $213.31 a share, Lam Research (LRCX) is trading about 14% below its 52-week high.
Do you think LRCX stock is a good long-term bet at current levels? What about at a 40% discount at about $128 per share? If you think that is a steal and have some cash ready to go, here is a trade.
10.0% annualized yield at 40% margin of safety by selling Put Options.
- Sell a long-dated Put option expiring 1/15/2027, with a strike price of $128
- Collect roughly $721 in premium per contract (each contract represents 100 shares)
- That’s about 6.0% annualized yield on the $12,800 you’re setting aside for the possibility of buying the stock
- This cash parked in a savings or money market account will earn an extra 4.0%, taking total yield to 10.0%
- And you give yourself a chance to buy LRCX stock at a deeply discounted price of $128
However, this is not the only stock strategy in town. Trefis High Quality Portfolio is a sophisticated framework designed to reduce stock-specific risk while giving upside exposure.
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Possible Trade Outcomes: You Win Either Way
| Stock Price Outcome | What It Means For You |
|---|---|
| LRCX stays above $128 | You keep the full $721 premium – 5.6% extra income over the next 344 days on cash that might otherwise earn you 4.0% or less. You never buy the stock and simply walk away with the cash. |
| LRCX closes below $128 | You’ll be obligated to buy 100 shares at $128. But thanks to $721 premium, your effective cost basis is just $120.79 per share – a roughly 43% discount from current level. |
But to hold this trade with conviction, you want to see long term upside in the stock. Because if it comes to it, you want to be excited about buying the stock cheap.
First, you want fundamentals to check out. For details, see Buy or Sell LRCX Stock or check Lam Research Investment Highlights
Second, you want to better understand competitive advantage and industry tailwinds. Below is what specifically gives us the conviction.
Why Hold LRCX Stock Long-Term
Lam Research is a critical enabler of the secular AI megatrend, supplying indispensable equipment to every major chipmaker. Its wide moat ensures durable profitability. We would be comfortable owning a dominant player in a structurally growing industry for the long term.
Competitive Advantage
We classify LRCX’s economic moat as WIDE, with the primary source being Switching Costs
- High switching costs are ‘prohibitive’ for customers to switch once Lam’s tools are installed.
- Achieved nearly 50% gross margin and 34.1% operating margin, demonstrating pricing power.
- Dominant market leader in etch equipment with 39% market share.
See Lam Research Full Analysis.
Industry Tailwind
The industry tailwind is STRONG, with CAGR projection of 7.91% – 9.20% (Source: TechSci Research, Verified Market Research)
Secular Trend: Artificial Intelligence (AI) & High-Performance Computing
Key Risks: Geopolitical tensions leading to trade regulations and export controls, particularly regarding China, and potential supply chain disruptions.
Financial Guardrails
Cash Generation: Positive Free Cash Flow
Balance Sheet: Strong balance sheet with more cash ($6.2B – $6.7B) than total debt (~$4.5B). Bankruptcy risk is negligible.
Not comfortable with options or stock-specific trades? PORTFOLIOS are even better.
Portfolios Are The Smarter Way To Invest
Individual stocks can soar or tank, but one thing matters: staying invested. The right portfolio can help you stay invested, capture upside, and mitigate the downside associated with any individual stock.
The Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has a track record of comfortably outperforming its benchmark that includes all 3 – the S&P 500, S&P mid-cap, and Russell 2000 indices. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.