Consistently, one of the more popular stocks people enter into their stock options watchlist at Stock Options Channel is AT&T Inc (T). So this week we highlight one interesting put contract, and one interesting call contract, from the February 2014 expiration for T. The put contract our YieldBoost algorithm identified as particularly interesting, is at the $32 strike, which has a bid at the time of this writing of 46 cents. Collecting that bid as the premium represents a 1.4% return against the $32 commitment, or a 4.2% annualized rate of return (at Stock Options Channel we call this the YieldBoost).
Selling a put does not give an investor access to T'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 AT&T Inc sees its shares fall 8.7% and the contract is exercised (resulting in a cost basis of $31.54 per share before broker commissions, subtracting the 46 cents from $32), the only upside to the put seller is from collecting that premium for the 4.2% annualized rate of return.
Turning to the other side of the option chain, we highlight one call contract of particular interest for the February 2014 expiration, for shareholders of AT&T Inc (T) looking to boost their income beyond the stock's 5.1% annualized dividend yield. Selling the covered call at the $36 strike and collecting the premium based on the 70 cents bid, annualizes to an additional 5.9% 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 11% annualized rate in the scenario where the stock is not called away. Any upside above $36 would be lost if the stock rises there and is called away, but T shares would have to advance 2.7% from current levels for that to happen, meaning that in the scenario where the stock is called, the shareholder has earned a 4.7% 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 AT&T Inc, highlighting in green where the $32 strike is located relative to that history, and highlighting the $36 strike in red: