May 12 2014, 11:41am CDT | by Forbes
Consistently, one of the more popular stocks people enter into their stock options watchlist at Stock Options Channel is United Technologies Corp. (NYSE: UTX). So this week we highlight one interesting put contract, and one interesting call contract, from the August expiration for UTX.
The put contract our YieldBoost algorithm identified as particularly interesting, is at the $110 strike, which has a bid at the time of this writing of $1.46. Collecting that bid as the premium represents a 1.3% return against the $110 commitment, or a 5% annualized rate of return (at Stock Options Channel we call this the YieldBoost).
Selling a put does not give an investor access to UTX’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 United Technologies Corp. sees its shares decline 7.1% and the contract is exercised (resulting in a cost basis of $108.54 per share before broker commissions, subtracting the $1.46 from $110), the only upside to the put seller is from collecting that premium for the 5% annualized rate of return.
Worth considering, is that the annualized 5% figure actually exceeds the 2% annualized dividend paid by United Technologies Corp. by 3%, based on the current share price of $118.48. 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 fall 7.13% to reach the $110 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 United Technologies Corp., looking at the dividend history chart for UTX 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% annualized dividend yield.
Turning to the other side of the option chain, we highlight one call contract of particular interest for the August expiration, for shareholders of United Technologies Corp. (NYSE: UTX) looking to boost their income beyond the stock’s 2% annualized dividend yield. Selling the covered call at the $120 strike and collecting the premium based on the $2.62 bid, annualizes to an additional 8.4% 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 10.4% annualized rate in the scenario where the stock is not called away. Any upside above $120 would be lost if the stock rises there and is called away, but UTX shares would have to advance 1.3% from current levels for that to happen, meaning that in the scenario where the stock is called, the shareholder has earned a 3.5% 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 United Technologies Corp., highlighting in green where the $110 strike is located relative to that history, and highlighting the $120 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 August 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 United Technologies Corp. (considering the last 251 trading day UTX historical stock prices using closing values, as well as today’s price of $118.48) to be 16%.
In mid-afternoon trading on Monday, the put volume among S&P 500 components was 651,182 contracts, with call volume at 1.19M, for a put:call ratio of 0.55 so far for the day. Compared to the long-term median put:call ratio of .65, that represents very high call volume relative to puts; in other words, buyers are preferring calls in options trading so far today.
Find out which 15 call and put options traders are talking about today./>
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