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Commit To Purchase Monolithic Power Systems At $125, Earn 9.8% Annualized Using Options


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Investors eyeing a purchase of Monolithic Power Systems Inc (Symbol: MPWR) shares, but tentative about paying the going market price of $133.30/share, might benefit from considering selling puts among the alternative strategies at their disposal. One interesting put contract in particular, is the December put at the $125 strike, which has a bid at the time of this writing of $6.70. Collecting that bid as the premium represents a 5.4% return against the $125 commitment, or a 9.8% annualized rate of return (at Stock Options Channel we call this the YieldBoost ).

Selling a put does not give an investor access to MPWR'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 $125 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 Monolithic Power Systems Inc sees its shares fall 6.1% and the contract is exercised (resulting in a cost basis of $118.30 per share before broker commissions, subtracting the $6.70 from $125), the only upside to the put seller is from collecting that premium for the 9.8% annualized rate of return.

Worth considering, is that the annualized 9.8% figure actually exceeds the 0.9% annualized dividend paid by Monolithic Power Systems Inc by 8.9%, based on the current share price of $133.30. 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 fall 6.09% to reach the $125 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 Monolithic Power Systems Inc, looking at the dividend history chart for MPWR 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 0.9% annualized dividend yield.

MPWR+Dividend+History+Chart

Below is a chart showing the trailing twelve month trading history for Monolithic Power Systems Inc, and highlighting in green where the $125 strike is located relative to that history:

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The chart above, and the stock's historical volatility, can be a helpful guide in combination with fundamental analysis to judge whether selling the December put at the $125 strike for the 9.8% annualized rate of return represents good reward for the risks. We calculate the trailing twelve month volatility for Monolithic Power Systems Inc (considering the last 251 trading day closing values as well as today's price of $133.30) to be 28%. For other put options contract ideas at the various different available expirations, visit the MPWR Stock Options page of StockOptionsChannel.com.

Top YieldBoost Puts of the S&P 500 »

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



This article appears in: Investing , Options
Referenced Symbols: MPWR


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