Consistently, one of the more popular stocks people enter into their stock options watchlist at Stock Options Channel is Alcoa, Inc. (Symbol: AA). So this week we highlight one interesting put contract, and one interesting call contract, from the January 2017 expiration for AA. The put contract our YieldBoost algorithm identified as particularly interesting, is at the $5 strike, which has a bid at the time of this writing of 22 cents. Collecting that bid as the premium represents a 4.4% return against the $5 commitment, or a 3.4% annualized rate of return (at Stock Options Channel we call this the YieldBoost ).
Selling a put does not give an investor access to AA'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. So unless Alcoa, Inc. sees its shares decline 50.6% and the contract is exercised (resulting in a cost basis of $4.78 per share before broker commissions, subtracting the 22 cents from $5), the only upside to the put seller is from collecting that premium for the 3.4% annualized rate of return.
Worth considering, is that the annualized 3.4% figure actually exceeds the 1.2% annualized dividend paid by Alcoa, Inc. by 2.2%, based on the current share price of $10.12. 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 50.59% to reach the $5 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 Alcoa, Inc., looking at the dividend history chart for AA 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 1.2% annualized dividend yield.
Turning to the other side of the option chain, we highlight one call contract of particular interest for the January 2017 expiration, for shareholders of Alcoa, Inc. (Symbol: AA) looking to boost their income beyond the stock's 1.2% annualized dividend yield. Selling the covered call at the $15 strike and collecting the premium based on the 64 cents bid, annualizes to an additional 4.9% rate of return against the current stock price (this is what we at Stock Options Channel refer to as the YieldBoost ), for a total of 6.1% annualized rate in the scenario where the stock is not called away. Any upside above $15 would be lost if the stock rises there and is called away, but AA shares would have to climb 48.2% from current levels for that to happen, meaning that in the scenario where the stock is called, the shareholder has earned a 54.5% return from this trading level, in addition to any dividends collected before the stock was called.
The chart below shows the trailing twelve month trading history for Alcoa, Inc., highlighting in green where the $5 strike is located relative to that history, and highlighting the $15 strike in red:
The chart above, and the stock's historical volatility, can be a helpful guide in combination with fundamental analysis to judge whether selling the January 2017 put or call options highlighted in this article deliver a rate of return that represents good reward for the risks. We calculate the trailing twelve month volatility for Alcoa, Inc. (considering the last 251 trading day AA historical stock prices using closing values, as well as today's price of $10.12) to be 35%.
In mid-afternoon trading on Monday, the put volume among S&P 500 components was 1.65M contracts, with call volume at 1.65M, for a put:call ratio of 0.73 so far for the day, which is above normal compared to the long-term median put:call ratio of .65. In other words, if we look at the number of call buyers and then use the long-term median to project the number of put buyers we'd expect to see, we're actually seeing more put buyers than expected out there in options trading so far today. Find out which 15 call and put options traders are talking about today .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.