Investors eyeing a purchase of Advance Auto Parts Inc (Symbol: AAP) shares, but tentative about paying the going market price of $142.43/share, might benefit from considering selling puts among the alternative strategies at their disposal. One interesting put contract in particular, is the March 2017 put at the $135 strike, which has a bid at the time of this writing of $6.80. Collecting that bid as the premium represents a 5% return against the $135 commitment, or a 12.3% annualized rate of return (at Stock Options Channel we call this the YieldBoost ).
Selling a put does not give an investor access to AAP'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. And the person on the other side of the contract would only benefit from exercising at the $135 strike if doing so produced a better outcome than selling at the going market price. ( Do options carry counterparty risk? This and six other common options myths debunked
). So unless Advance Auto Parts Inc sees its shares decline 5.2% and the contract is exercised (resulting in a cost basis of $128.20 per share before broker commissions, subtracting the $6.80 from $135), the only upside to the put seller is from collecting that premium for the 12.3% annualized rate of return.
Interestingly, that annualized 12.3% figure actually exceeds the 0.2% annualized dividend paid by Advance Auto Parts Inc by 12.1%, based on the current share price of $142.43. And yet, if an investor was to buy the stock at the going market price in order to collect the dividend, there is greater downside because the stock would have to lose 5.17% to reach the $135 strike price.
Always important when discussing dividends is the fact that, in general, dividend amounts are not always predictable and tend to follow the ups and downs of profitability at each company. In the case of Advance Auto Parts Inc, looking at the dividend history chart for AAP below can help in judging whether the most recent dividend is likely to continue, and in turn whether it is a reasonable expectation to expect a 0.2% annualized dividend yield.
Below is a chart showing the trailing twelve month trading history for Advance Auto Parts Inc, and highlighting in green where the $135 strike is located relative to that history:
The chart above, and the stock's historical volatility, can be a helpful guide in combination with fundamental analysis to judge whether selling the March 2017 put at the $135 strike for the 12.3% annualized rate of return represents good reward for the risks. We calculate the trailing twelve month volatility for Advance Auto Parts Inc (considering the last 253 trading day closing values as well as today's price of $142.43) to be 29%. For other put options contract ideas at the various different available expirations, visit the AAP Stock Options
page of StockOptionsChannel.com.
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