Strategy To YieldBoost American Railcar Industries To 19.8% Using Options

Shareholders of American Railcar Industries Inc ( ARII) looking to boost their income beyond the stock's 2.3% annualized dividend yield can sell the March 2014 covered call at the $45 strike and collect the premium based on the $2.40 bid, which annualizes to an additional 17.5% rate of return against the current stock price (at Stock Options Channel we call this the YieldBoost), for a total of 19.8% annualized rate in the scenario where the stock is not called away. Any upside above $45 would be lost if the stock rises there and is called away, but ARII shares would have to climb 3.6% from current levels for that to occur, meaning that in the scenario where the stock is called, the shareholder has earned a 9.1% return from this trading level, in addition to any dividends collected before the stock was called.

START SLIDESHOW:
Top YieldBoost Calls of the S&P 500 »

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 American Railcar Industries Inc, looking at the dividend history chart for ARII 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 2.3% annualized dividend yield.

ARII+Dividend+History+Chart

Below is a chart showing ARII's trailing twelve month trading history, with the $45 strike highlighted in red:

Loading+chart++2013+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 2014 covered call at the $45 strike gives good reward for the risk of having given away the upside beyond $45. ( Do most options expire worthless? This and six other common options myths debunked). We calculate the trailing twelve month volatility for American Railcar Industries Inc (considering the last 253 trading day closing values as well as today's price of $43.45) to be 41%. For other call options contract ideas at the various different available expirations, visit the ARII Stock Options page of StockOptionsChannel.com.

In mid-afternoon trading on Wednesday, the put volume among S&P 500 components was 530,471 contracts, with call volume at 938,894, for a put:call ratio of 0.56 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.

null

If you liked this article you might like

Like Buffett, Rail Investors Could Be on the Right Track

Like Buffett, Rail Investors Could Be on the Right Track

You Asked for It: My List of 9 Leveraged Small-Cap Cheapies

Analysts' Actions -- Abbott Labs, Pandora, United Continental, More

Enterprise Value Growth and Income: A Portfolio Model for All Seasons

Enterprise Value Growth and Income: A Portfolio Model for All Seasons