With the stock market looking quite volatile today, it might be worth looking at a lower-beta stock such as Realty Income. Income investors that want to increase the yield on this Realty Income stock could look at a covered call trade.
Realty Income is a real estate investment trust (REIT) specializing in acquiring and managing retail properties leased to regional and national retail chain operators across all 50 U.S. states. Chipotle Mexican Grill, for instance, is a renter of Realty Income's property space.
The company is renowned for its monthly dividend payments, appealing to income-focused investors. Realty Income stock currently has an annual dividend yield of 5.27% and has increased its annual dividend for 30 consecutive years. As such, it qualifies as a member of the Dividend Aristocrats index.
Realty Income Stock: The Covered Call
A covered call strategy is one way to slightly reduce the risk on a long stock position while also generating some premium. The catch is that upside is limited above the covered call strike. So, let's look at how a covered call trade on Realty Income might take shape.
Buying 100 shares of Realty Income would cost around $5,464, based on recent trading. A March 21-expiring 55-strike call option is trading around $1.25, generating $125 in premium per contract.
Selling the call option generates an income of roughly 2.3% in a month and a half, equaling around 18.2% annualized.
If Realty Income stock closes above 55 on the expiration date, the shares will be called away at 55, leaving the trader with a total profit of $161 (gain on the shares plus the $125 option premium received).
That equates to a 3% return in Realty Income stock, or 23.4% on an annualized basis.
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The Reward Vs. Risk
If Realty Income stays below 55, the investor can continue selling call options until the shares get called away. Of course, the risk with the trade is that Realty Income stock might drop, which could wipe out any gains made from selling the call.
Covered calls can be an effective strategy for generating income, managing downside risk, and reducing the effective purchase price of a stock.
One downside for this stock? Poor IBD ratings. So, investors would need to weigh that up before making any investment decision.
According to IBD Stock Checkup, Realty Income stock ranked 83rd in its group and has a Composite Rating of 40, an EPS Rating of 39 and a Relative Strength Rating of 27.
Earnings Coming
Realty Income is due to report earnings on Feb. 24 after the closing bell, then hold a conference call the next morning.
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.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
