Consistently, one of the more popular stocks people enter into their stock options watchlist at Stock Options Channel is Home Depot (HD) So this week we highlight one interesting put contract, and one interesting call contract, from the April expiration for HD.
The put contract our YieldBoost algorithm identified as particularly interesting, is at the $70 strike, which has a bid at the time of this writing of $1.03. Collecting that bid as the premium represents a 1.5% return against the $70 commitment, or a 7.2% annualized rate of return (at Stock Options Channel we call this the YieldBoost).
Selling a put does not give an investor access to HD’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 Home Depot sees its shares decline 7.5% and the contract is exercised (resulting in a cost basis of $68.97 per share before broker commissions, subtracting the $1.03 from $70), the only upside to the put seller is from collecting that premium for the 7.2% annualized rate of return.
Interestingly, that annualized 7.2% figure actually exceeds the 2.1% annualized dividend paid by Home Depot by 5.1%, based on the current share price of $75.66. 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 lose 7.54% to reach the $70 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 Home Deport, looking at the dividend history chart for HD 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 2.1% annualized dividend yield.
Turning to the other side of the option chain, we highlight one call contract of particular interest for the April expiration, for shareholders of Home Depot looking to boost their income beyond the stock’s 2.1% annualized dividend yield.
Selling the covered call at the $77.50 strike and collecting the premium based on the $1.81 bid, annualizes to an additional 11.6% 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 13.7% annualized rate in the scenario where the stock is not called away. Any upside above $77.50 would be lost if the stock rises there and is called away, but HD shares would have to climb 2.4% from current levels for that to occur, meaning that in the scenario where the stock is called, the shareholder has earned a 4.8% 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 Home Depot highlighting in green where the $70 strike is located relative to that history, and highlighting the $77.50 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 April 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 Home Depot (considering the last 251 trading day HD historical stock prices using closing values, as well as today’s price of $75.66) to be 17%.