Consistently, one of the more popular stocks people enter into their stock options watchlist at Stock Options Channel is Merck & Co., Inc (MRK). So this week we highlight one interesting put contract, and one interesting call contract, from the January 2014 expiration for MRK. The put contract our YieldBoost algorithm identified as particularly interesting, is at the $45 strike, which has a bid at the time of this writing of 65 cents. Collecting that bid as the premium represents a 1.4% return against the $45 commitment, or a 7.8% annualized rate of return (at Stock Options Channel we call this the YieldBoost).
Selling a put does not give an investor access to MRK'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 Merck & Co., Inc sees its shares decline 4.1% and the contract is exercised (resulting in a cost basis of $44.35 per share before broker commissions, subtracting the 65 cents from $45), the only upside to the put seller is from collecting that premium for the 7.8% annualized rate of return.
Worth considering, is that the annualized 7.8% figure actually exceeds the 3.7% annualized dividend paid by Merck & Co., Inc by 4.1%, based on the current share price of $46.92. 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 fall 4.13% to reach the $45 strike price.