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TheStreet Open House

How To YieldBoost Pier 1 Imports From 1.3% To 7.7% Using Options

Stocks in this article: PIR

Shareholders of Pier 1 Imports Inc. (PIR) looking to boost their income beyond the stock's 1.3% annualized dividend yield can sell the December covered call at the $21 strike and collect the premium based on the 75 cents bid, which annualizes to an additional 6.4% rate of return against the current stock price (at Stock Options Channel we call this the YieldBoost), for a total of 7.7% annualized rate in the scenario where the stock is not called away. Any upside above $21 would be lost if the stock rises there and is called away, but PIR shares would have to advance 15.1% from current levels for that to occur, meaning that in the scenario where the stock is called, the shareholder has earned a 19.2% 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 Pier 1 Imports Inc., looking at the dividend history chart for PIR 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 1.3% annualized dividend yield.

PIR+Dividend+History+Chart

Below is a chart showing PIR's trailing twelve month trading history, with the $21 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 December covered call at the $21 strike gives good reward for the risk of having given away the upside beyond $21. ( Do most options expire worthless? This and six other common options myths debunked). We calculate the trailing twelve month volatility for Pier 1 Imports Inc. (considering the last 252 trading day closing values as well as today's price of $18.25) to be 34%. For other call options contract ideas at the various different available expirations, visit the PIR Stock Options page of StockOptionsChannel.com.

In mid-afternoon trading on Tuesday, the put volume among S&P 500 components was 802,511 contracts, with call volume at 1.37M, for a put:call ratio of 0.58 so far for the day. Compared to the long-term median put:call ratio of .65, that represents high call volume relative to puts; in other words, buyers are showing a preference for calls in options trading so far today. Find out which 15 call and put options traders are talking about today.

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