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 2016 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 $2.04. Collecting that bid as the premium represents a 4.5% return against the $45 commitment, or a 3.1% 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 fall 20.2% and the contract is exercised (resulting in a cost basis of $42.96 per share before broker commissions, subtracting the $2.04 from $45), the only upside to the put seller is from collecting that premium for the 3.1% annualized rate of return.
Turning to the other side of the option chain, we highlight one call contract of particular interest for the January 2016 expiration, for shareholders of Merck & Co., Inc (MRK) looking to boost their income beyond the stock's 3.1% annualized dividend yield. Selling the covered call at the $65 strike and collecting the premium based on the $1.93 bid, annualizes to an additional 2.4% 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 5.5% annualized rate in the scenario where the stock is not called away. Any upside above $65 would be lost if the stock rises there and is called away, but MRK shares would have to climb 15.2% from current levels for that to occur, meaning that in the scenario where the stock is called, the shareholder has earned a 18.6% 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 Merck & Co., Inc, highlighting in green where the $45 strike is located relative to that history, and highlighting the $65 strike in red: