Strategy To YieldBoost Hewlett-Packard To 4.9% Using Options

Shareholders of Hewlett-Packard (HPQ) looking to boost their income beyond the stock's 2% annualized dividend yield can sell the January 2016 covered call at the $40 strike and collect the premium based on the $1.63 bid, which annualizes to an additional 2.9% rate of return against the current stock price (at Stock Options Channel we call this the YieldBoost), for a total of 4.9% annualized rate in the scenario where the stock is not called away. Any upside above $40 would be lost if the stock rises there and is called away, but HPQ shares would have to climb 35% from current levels for that to happen, meaning that in the scenario where the stock is called, the shareholder has earned a 40.5% 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 Hewlett-Packard Co, looking at the dividend history chart for HPQ 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% annualized dividend yield.

Below is a chart showing HPQ's trailing twelve month trading history, with the $40 strike highlighted in red:

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 2016 covered call at the $40 strike gives good reward for the risk of having given away the upside beyond $40. ( Do most options expire worthless? This and six other common options myths debunked). We calculate the trailing twelve month volatility for Hewlett-Packard Co (considering the last 252 trading day closing values as well as today's price of $29.58) to be 37%. For other call options contract ideas at the various different available expirations, visit the HPQ Stock Options page of StockOptionsChannel.com.

In mid-afternoon trading on Wednesday, the put volume among S&P 500 components was 535,950 contracts, with call volume at 944,393, for a put:call ratio of 0.57 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.