In today’s uncertain market, there is one certainty – that Americans will generate lots of garbage in 2012.
With this in mind, we like the security of owning Waste Management (NYSE:WM). Shares of this large-cap stock trade at a price-to-book ratio of 2.5, a price-to-earnings multiple of 15.4 and a trailing price-to-sales multiple of 1.1.
On top of this value, the stock also pays $1.36 in dividends, for a 4.4% annualized yield or 1.1% quarterly. Over the past decade, shareholders in Waste Management have enjoyed a 16.0% average annual return on equity.
We want squeeze even more cash out of this stock next quarter by selling the WM April 33 Calls against long shares of the stock. The call can be sold for $1.10, and will bring the position’s quarterly yield to 4.5%.
If Waste Management’s stock closes above $33 at April expiration, the position benefits from the stock’s appreciation as well and can return up to 8.5%. But even if the stock goes nowhere, the $1.10 premium is yours to keep and lowers the effective breakeven point of the trade.
Given that the market volatility of the last few months is likely to continue into 2012, a lower breakeven and high yield make this trade about as safe as owning stocks gets. Once again, Stutland Volatility Group is using options to risk less and make more.
Here’s a quick overview of this covered call (or buy-write, if you don’t already own the shares) trade.
Stock Price: 31.75
Option Play: Covered Call
Sell: April 33 Call @ $1.10
Buy: 100 Shares @ $31.75
Net Cost: $30.65 = 31.75 – 1.10 (Stock Price – Credit Received)
Breakeven: $30.65 (Net Cost)
Max Profit: $2.35 = 33.00 – 31.75 + 1.10 (Short Strike – Stock + Premium)
Max Loss: $30.65 (Net Cost)
Call Away % Return: 7.67%