Philip Morris International (PM)
Philip Morris International (PM) is a great choice in this arena. Here we have a massive company selling an addictive — and very popular — global product.
As I write, PM stock trades at $85.51, and the Jan 2015 $87.50 calls are selling for $3.80. First of all, you get a 4.34% premium, which is generous on a large-cap LEAP. So you are protected down to $81.71. Sure, the stock could fall more, but the point isn’t to eliminate all downside risk, but rather to hedge against it.
Now, here’s the beauty of using this particular company: PM stock pays a 4.4% yield, or $3.76 per share. Because you still hold the underlying stock, you collect the dividend as long as that stock doesn’t get called away. If Philip Morris stock ends at $85.51 come expiration, you still will have earned a total of 8.74%. If the stock gets called away, you will have collected the same amount in dividends and premiums anyway.
Thus, for the deal to be a loser for you on the upside, the stock will have to close at $93.07. And you can always buy it back before, during or after it gets called away.