When I saw bonds spiking yesterday I knew I was about to get another opportunity to work a trade on TBT again. I didn’t trade this yesterday because I thought I’d get an even better chance today. Instead bonds cooled off some, TBT rose and I was faced with a lower premium to work with. I didn’t let that stop me from making a new trade on the ultra, inverse 20 year bond ETF. While TBT was trading at $18.45 I sold five January $18 naked puts for $0.69 each and received $342.13 after commissions.
I don’t consider this much of a risk based on the floor TBT has held for a while at $18.00. The premium gives me a good cushion to keep me patient in case that support breaks and TBT drops more. If it does and I’m assigned 500 shares I can’t imagine it staying below $17.31 (my cost per share) for long. Depending on what’s going on at that time, I’d like to think I wouldn’t sell covered calls on these shares and would wait for a fall in bonds and a rise in TBT.
The biggest risk I have in the very near term is that I didn’t close the five naked puts I have expiring tomorrow. I could be setting myself up to own 1,000 shares, but the same logic follows, just with more exposure. TBT won’t stay down for long. If I’m assigned 500 shares tomorrow I think I’d go ahead and write covered calls on this lot to cushion the rest of my exposure. We’ll see. For today’s trade I stand to make 3.94% in less than five and a half weeks. That comes out to an annualized return of 38%. A potential return like that is worth some risk to me, especially when I don’t believe it’s too risky longer term.
After I sold my first lot that expires tomorrow, TBT ran back up above $20.00. I’ll be happy to see it pop back above $19 if can make a quick flip of the shares for a profit. It’d be easier to just let the options expire worthless, but this market is too volatile to pretend to be able to predict that with any real certainty. I have six other options expiring tomorrow in addition to the original TBT puts, so I’ll be sure to write up a summary in the afternoon. Most aren’t very close to the money, but DSX is only $0.04 off the $8 strike where I have a short straddle. MVV is only $0.57 off the $51 strike where I have a covered call. This stock and ETF can move that much in less than a minute, let alone another full trading day.
If you or any of your clients have accounts where they’re looking for low-risk, dividend yielding stocks, you should have a look at BDX.
If it drops a couple of points from here, the January 65 Puts should easily fetch 1.5% on capital risked – or about 18% annualised. Whilst this isn’t great if you’re looking for higher risked positions, it’s a good pick for some – for example, those nearing retirement.
If you get $1 for the 65 Puts and they’re assigned at a basis of $64, that’d be a dividend yield of 2.8% on the basis. This would rise to 3% if BDX rise their dividend next year – which, based on their record over numerous years, is almost guaranteed.
Also, despite consistent raises in dividend payouts, the payout ratio is still only 29.
The last time BDX was below $60 was in 2006 – and, at that time, the dividend was 21.5 cents as opposed to todays 45 cents.
Just to add, my preferred strategy for this type of stock in a low-risk account would be (after assignment) to sell Covered Calls a quarter out for 2% of the underlying stocks value.
For example, you could get $1.50 for the March 75 Calls at the moment. Assumming your covered calls don’t end up assigned, you’d be getting (2% * 4) = 8% in premiums per year and 3% in dividends for a total of 11%. If they are assigned, you’d be doing better.
In my opinion, 11% in addition to the potential capital appreciation is a pretty good return when you consider the level of risk involved here. As an example, have a look at this chart ( http://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chfdeh=0&chdet=1324069200000&chddm=492662&chls=IntervalBasedLine&cmpto=INDEXSP:.INX&cmptdms=0&q=NYSE:BDX&ntsp=0 ) which shows the range of BDX against the S&P 500 over the past 5 years – basically, covering the whole financial crisis and partial recovery.
At the 5 year low point, BDX dropped about 15% from it’s top. This is in contrast to the S&P 500’s drop of over 50% from peak.
It’s hard to argue with that logic Ronan. I love the 11% potential if it only stays flat. What’s the deal with the past 6-12 month comparisons though? The SPX has been killing it? I haven’t taken the time to see what news has come out against BDX yet. Do they have patents expiring or are they losing market share?