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YieldBoost Snap-On From 1.7% To 10.8% Using Options

Shareholders of Snap-On (SNA) looking to boost their income beyond the stock's 1.7% annualized dividend yield can sell the March covered call at the $110 strike and collect the premium based on the $1.60 bid, which annualizes to an additional 9.2% rate of return against the current stock price (at Stock Options Channel we call this the YieldBoost), for a total of 10.8% annualized rate in the scenario where the stock is not called away. Any upside above $110 would be lost if the stock rises there and is called away, but SNA shares would have to advance 3.3% from current levels for that to happen, meaning that in the scenario where the stock is called, the shareholder has earned a 4.8% return from this trading level, in addition to any dividends collected before the stock was called.

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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 Snap-On, Inc., looking at the dividend history chart for SNA 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 1.7% annualized dividend yield.

SNA+Dividend+History+Chart

Below is a chart showing SNA's trailing twelve month trading history, with the $110 strike highlighted in red:

Loading+chart++2014+TickerTech.com

The chart above, and the stock's historical volatility, can be a helpful guide in combination with fundamental analysis to judge whether selling the March covered call at the $110 strike gives good reward for the risk of having given away the upside beyond $110. (Do most options expire worthless? This and six other common options myths debunked). We calculate the trailing twelve month volatility for Snap-On, Inc. (considering the last 251 trading day closing values as well as today's price of $106.17) to be 18%. For other call options contract ideas at the various different available expirations, visit the SNA Stock Options page of StockOptionsChannel.com.

Stock quotes in this article: SNA 

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