ADI

Commit To Purchase Analog Devices At $192.50, Earn 48.5% Annualized Using Options

Investors eyeing a purchase of Analog Devices Inc (Symbol: ADI) stock, but tentative about paying the going market price of $193.53/share, might benefit from considering selling puts among the alternative strategies at their disposal. One interesting put contract in particular, is the March put at the $192.50 strike, which has a bid at the time of this writing of $4.60. Collecting that bid as the premium represents a 2.4% return against the $192.50 commitment, or a 48.5% annualized rate of return (at Stock Options Channel we call this the YieldBoost).

Selling a put does not give an investor access to ADI'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 $192.50 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 Analog Devices Inc sees its shares decline 1.1% and the contract is exercised (resulting in a cost basis of $187.90 per share before broker commissions, subtracting the $4.60 from $192.50), the only upside to the put seller is from collecting that premium for the 48.5% annualized rate of return.

Interestingly, that annualized 48.5% figure actually exceeds the 1.8% annualized dividend paid by Analog Devices Inc by 46.7%, based on the current share price of $193.53. 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 1.15% to reach the $192.50 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 Analog Devices Inc, looking at the dividend history chart for ADI 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 1.8% annualized dividend yield.

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Below is a chart showing the trailing twelve month trading history for Analog Devices Inc, and highlighting in green where the $192.50 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 March put at the $192.50 strike for the 48.5% annualized rate of return represents good reward for the risks. We calculate the trailing twelve month volatility for Analog Devices Inc (considering the last 250 trading day closing values as well as today's price of $193.53) to be 26%. For other put options contract ideas at the various different available expirations, visit the ADI Stock Options page of StockOptionsChannel.com.

Top YieldBoost Puts of the Nasdaq 100 »

Also see:
• Stocks Crossing Above Their 200 Day Moving Average
• ADMP Insider Buying
• ANCX Insider Buying

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

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