Double Yields on Annaly (NLY) and Calumet (CLMT) with Options

Selling way out-of-the-money options can generate steady cash

   

There are income investors – and portfolios and options traders – and options accounts – and never the twain shall meet (forgive me, Georgetown, my alma mater, had a terrific core curriculum).

Well, maybe they should, because high yield stocks rose yesterday and are back on track to move up, individually and as a group. You can play them two ways – simply sell some puts – that is right, sell, not buy (buying options is for suckers at the beginning of earnings season) – or buy the shares and sell calls.

Let’s look at two names, Annaly Capital (NYSE:NLY) and Calumet Specialty Products Partners, L.P. (NASDAQ:CLMT). I own and trade both.

Annaly is the granddaddy of mortgage REITs, and arguably the granddaddy of income stocks, currently yielding 11.3%.  It is also touching $16 and that is a fabulous place to sell some options.  If you sold the $16 April put right now, you would get around $15 per contract – a one percent return, if it expires worthless, in less than two weeks. That’s fifty percent a year if you repeat this trade regularly.  Why do I think it will expire worthless? The stock goes ex-dividend after expiration and the stock is on its quarterly run up to that date. If you buy the shares around $16 and sell the May $30 call you net around $30 a contract, a 2% return or so in six weeks, again, a return of 15% or more for the year – plus the probable dividend of 45 cents (or $45 per 100 shares) if you do not get called out (you stand a good chance of this happening if the stock stays above $16). If you do not get called out, you are now netting $75 per 100 shares, or a return of 4.7% in six weeks.

Calumet is a specialty refiner that just completed a secondary and sits in the Midwest, enjoying close access to all that new oil coming out of North Dakota. They do not follow the boom and bust cycles of most refiners, as they have far less exposure to the gasoline market – they are the world leader in aviation lubricants, have a much larger share of diesel coming out of their refinery runs – and are expanding through acquisition. CLMT  yields 7.2% and just bounced off of a recent low near $35 and the stock is moving back towards $40. Sell the $35 put for May and you get a buck – a buck! – a 3% return in six weeks, a 25% or so return for the year. Buy the shares around $36.50 and sell some May $40 calls and you will get (probably) a dividend of 65 cents a share at the end of April plus 25 cents a share for selling the call. That is $90 a share or 2.5% in six weeks.

Bottom line: you can turn dividend stocks with already-high yields – 11.2% and 7.2% — into something more than double. Think about it.

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