Consistently, one of the more popular stocks people enter into their stock options watchlist at Stock Options Channel is Home Depot Inc (HD). So this week we highlight one interesting put contract, and one interesting call contract, from the January 2016 expiration for HD. The put contract our YieldBoost algorithm identified as particularly interesting, is at the $50 strike, which has a bid at the time of this writing of $2.92. Collecting that bid as the premium represents a 5.8% return against the $50 commitment, or a 2.6% annualized rate of return (at Stock Options Channel we call this the YieldBoost).
Selling a put does not give an investor access to HD'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 Home Depot Inc sees its shares decline 34.3% and the contract is exercised (resulting in a cost basis of $47.08 per share before broker commissions, subtracting the $2.92 from $50), the only upside to the put seller is from collecting that premium for the 2.6% annualized rate of return.
Interestingly, that annualized 2.6% figure actually exceeds the 2% annualized dividend paid by Home Depot Inc, based on the current share price of $76.20. 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 lose 34.31% to reach the $50 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 Home Depot Inc, looking at the dividend history chart for HD 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.