Commit To Purchase Brookdale Senior Living At $6, Earn 16.5% Annualized Using Options

A generic image of a pen, a calculator and papers Credit: Shutterstock photo

Investors considering a purchase of Brookdale Senior Living Inc (Symbol: BKD) shares, but cautious about paying the going market price of $6.78/share, might benefit from considering selling puts among the alternative strategies at their disposal. One interesting put contract in particular, is the July 2019 put at the $6 strike, which has a bid at the time of this writing of 55 cents. Collecting that bid as the premium represents a 9.2% return against the $6 commitment, or a 16.5% annualized rate of return (at Stock Options Channel we call this the YieldBoost ).

Selling a put does not give an investor access to BKD'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 $6 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 Brookdale Senior Living Inc sees its shares fall 12.4% and the contract is exercised (resulting in a cost basis of $5.45 per share before broker commissions, subtracting the 55 cents from $6), the only upside to the put seller is from collecting that premium for the 16.5% annualized rate of return.

Below is a chart showing the trailing twelve month trading history for Brookdale Senior Living Inc, and highlighting in green where the $6 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 July 2019 put at the $6 strike for the 16.5% annualized rate of return represents good reward for the risks. We calculate the trailing twelve month volatility for Brookdale Senior Living Inc (considering the last 251 trading day closing values as well as today's price of $6.78) to be 49%. For other put options contract ideas at the various different available expirations, visit the BKD Stock Options page of StockOptionsChannel.com.

In mid-afternoon trading on Friday, the put volume among S&P 500 components was 1.25M contracts, with call volume at 1.46M, for a put:call ratio of 0.85 so far for the day, which is unusually high compared to the long-term median put:call ratio of .65. In other words, there are lots more put buyers out there in options trading so far today than would normally be seen, as compared to call buyers. Find out which 15 call and put options traders are talking about today .

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.

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

More Related Articles

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.