Commit To Buy Legg Mason At $45, Earn 8.8% Annualized Using Options

Investors considering a purchase of Legg Mason, Inc. ( LM) stock, but tentative about paying the going market price of $47.37/share, might benefit from considering selling puts among the alternative strategies at their disposal. One interesting put contract in particular, is the November put at the $45 strike, which has a bid at the time of this writing of $2.60. Collecting that bid as the premium represents a 5.8% return against the $45 commitment, or a 8.8% annualized rate of return (at Stock Options Channel we call this the YieldBoost).

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Selling a put does not give an investor access to LM'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. And the person on the other side of the contract would only benefit from exercising at the $45 strike if doing so produced a better outcome than selling at the going market price. ( Do options carry counterparty risk? This and six other common options myths debunked). So unless Legg Mason, Inc. sees its shares fall 5.5% and the contract is exercised (resulting in a cost basis of $42.40 per share before broker commissions, subtracting the $2.60 from $45), the only upside to the put seller is from collecting that premium for the 8.8% annualized rate of return.

Interestingly, that annualized 8.8% figure actually exceeds the 1.1% annualized dividend paid by Legg Mason, Inc. by 7.7%, based on the current share price of $47.37. And yet, if an investor was to buy the stock at the going market price in order to collect the dividend, there is greater downside because the stock would have to lose 5.46% to reach the $45 strike price.

Always important when discussing dividends is the fact that, 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 Legg Mason, Inc., looking at the dividend history chart for LM 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 1.1% annualized dividend yield.

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Below is a chart showing the trailing twelve month trading history for Legg Mason, Inc., and highlighting in green where the $45 strike is located relative to that history:

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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 November put at the $45 strike for the 8.8% annualized rate of return represents good reward for the risks. We calculate the trailing twelve month volatility for Legg Mason, Inc. (considering the last 252 trading day closing values as well as today's price of $47.37) to be 26%. For other put options contract ideas at the various different available expirations, visit the LM Stock Options page of StockOptionsChannel.com.

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