Real Estate Investment Trusts or REITs have always been popular with income investors for their consistent and high dividends.
As sophisticated investors, we can boost the yield provided from REITs through the use of options. The strategy is a known as a covered call which involves selling call options against a stock position.
Let’s use Realty Income O as an example.
O Covered Call Example
When running the Covered Call Screener for O, we find the following results:
Let’s evaluate the first covered call example. Buying 100 shares of O stock would cost $6,375. The December 12, 65 strike call option was trading yesterday for around $1.70, generating $170 in premium per contract for covered call sellers. Selling the call option generates an income of 2.75% in 141 days, equalling around 7.04% annualized. That assumes the stock stays exactly where it is. What if the stock rises above the strike price of 65?
If O closes above 65 on the expiration date, the shares will be called away at 65, leaving the trader with a total profit of $295 (gain on the shares plus the $170 option premium received). That equates to a 5.2% return, which is 13.4% on an annualized basis.
Let’s look at another example, this time using a further out-of-the-money call which provides less income but allows for more capital appreciation.
Instead of the December 65 call, let’s look at the 70 call. Selling the December 70 call option for $0.30 generates an income of 0.47%, in 141 days, equalling around 1.22% annualized. If O closes above 70 on the expiration date, the shares will be called away at 70, leaving the trader with a total profit of $655 (gain on the shares plus the $30 option premium received).
That equates to a 10.7% return, which is 27.8% on an annualized basis.
Of course, the risk with the trade is that the O might drop, which could wipe out any gains made from selling the call.
Barchart Technical Opinion
The Barchart Technical Opinion rating is a 8% Buy with a Weakening short term outlook on maintaining the current direction.
The market is in highly overbought territory. Beware of a trend reversal.
Implied volatility is at 14.54% compared to a 12-month low of 14.00% and a 12-month high of 31.39%. The implied volatility rank is 3.1% and the IV percentile is 5%.
O currently yields around 4.84% annually.
Profile
Realty Income is engaged in the acquisition and management of freestanding commercial properties which reap rental revenue under long-term net lease agreements.
It's structured as a real estate investment trust, or REIT.
Realty Income's portfolio comprises more than 11,000 properties, located in all U.S. states, Puerto Rico, the United Kingdom and Spain.
These properties are leased to the tenants belonging to multiple separate industries.
The combined entity through the merger with VEREIT, is poised to benefit from the enhanced size, scale, diversification and synergies.
Please remember that options are risky, and investors can lose 100% of their investment. This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
