There was a big move on Monday in one of my favorite stocks, Ashford Hospitality Trust (NYSE: AHT). I’ve followed this stock, and owned it on and off, since its IPO. So I’m familiar with its price action, and Monday’s 7% move upwards was unusual. It may not signify anything, but it does create an opportunity to profit from further moves in either direction. There’s also a way to do so without it costing you as much as usual.
First, buy Ashford’s Preferred Series D stock. These are price-stable preferred shares trading at $24.82. The ex-dividend date is approaching, so if you own the stock on March 31, you’ll pick up a large dividend payment of almost $0.53 per share. The common also will pay $0.11 per share, for a total take of $0.64.
Knowing that you have that dividend coming in, you can use all or a portion of the 64 cents per share to buy May 10 puts and calls. The May 10-strike calls are trading at around 35 cents per share, and the May 10 puts are trading at roughly 85 cents. That way, if some big news hits Ashford, you’ll be able to profit either way. In the meantime, I’d hold onto the Preferred shares for their 8.45% yield.
I like the McDonald’s (NYSE: MCD) covered-call situation here. First, McDonald’s stock has been strong as of late and doesn’t show too much sign of selling off in any big way. They are also rolling out their new McBakery product line, and I expect this to do just as well as their coffee products have. This means a whole new market for them. The May 97.5 calls can be sold for $1.80, and that’s a nice and tidy return for this solid stock.
Has anyone else noticed how Citigroup (NYSE: C) has been blasting higher as of late? After a continuous decline that lasted for months, the stock has finally roared back 50% off its late-2011 lows. The bank is separating its toxic assets from the rest of its operations, which is why Bill Ackman purchased a huge chunk of the company. The market has found its faith again in this name. If you are still unsure, but want to cash in big in the event that the comeback has staying power, I suggest buying the July 40-strike calls for $2 per contract. This strategy is limited risk (losses are capped at the premium paid) with big potential upside.
Finally, have a look at Sanofi (NYSE: SNY). This mega-pharmaceutical company produced $10 billion in free cash flow last year, giving it the kind of stability you want in a company to sell calls against. You can buy the stock at $38.76, and sell the May 39 calls for 85 cents each. Along with the 24-cent appreciation in the underlying, the trade yields almost 3% for a seven-week holding period – that’s a 23% annualized return.
As of this writing, Lawrence Meyers is long Ashford Hospitality Trust, and its Preferred D shares. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books
