Strategy To YieldBoost Norfolk Southern Corp. From 2.7% To 5.4%

Shareholders of Norfolk Southern Corp. ( NSC) looking to boost their income beyond the stock's 2.7% annualized dividend yield can sell the January 2015 covered call at the $90 strike and collect the premium based on the $2.80 bid, which annualizes to an additional 2.7% rate of return against the current stock price (at Stock Options Channel we call this the YieldBoost), for a total of 5.4% annualized rate in the scenario where the stock is not called away. Any upside above $90 would be lost if the stock rises there and is called away, but NSC shares would have to advance 15.5% from current levels for that to occur, meaning that in the scenario where the stock is called, the shareholder has earned a 19.1% 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 Norfolk Southern Corp., looking at the dividend history chart for NSC 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 2.7% annualized dividend yield.

NSC+Dividend+History+Chart

Below is a chart showing NSC's trailing twelve month trading history, with the $90 strike highlighted in red:

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The chart above, and the stock's historical volatility, can be a helpful guide in combination with fundamental analysis to judge whether selling the January 2015 covered call at the $90 strike gives good reward for the risk of having given away the upside beyond $90. ( Do most options expire worthless? This and six other common options myths debunked). We calculate the trailing twelve month volatility for Norfolk Southern Corp. (considering the last 250 trading day closing values as well as today's price of $78.28) to be 21%. For other call options contract ideas at the various different available expirations, visit the NSC Stock Options page of StockOptionsChannel.com.

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