Commit To Purchase Plum Creek Timber At $40, Earn 4.2% Annualized Using Options

Investors eyeing a purchase of Plum Creek Timber Co., Inc. (PCL) shares, but cautious about paying the going market price of $44.70/share, might benefit from considering selling puts among the alternative strategies at their disposal. One interesting put contract in particular, is the February 2015 put at the $40 strike, which has a bid at the time of this writing of $1.10. Collecting that bid as the premium represents a 2.8% return against the $40 commitment, or a 4.2% annualized rate of return (at Stock Options Channel we call this the YieldBoost).

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

Selling a put does not give an investor access to PCL'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 $40 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 Plum Creek Timber Co., Inc. sees its shares decline 10.8% and the contract is exercised (resulting in a cost basis of $38.90 per share before broker commissions, subtracting the $1.10 from $40), the only upside to the put seller is from collecting that premium for the 4.2% annualized rate of return.

Interestingly, that annualized 4.2% figure actually exceeds the 3.9% annualized dividend paid by Plum Creek Timber Co., Inc., based on the current share price of $44.70. 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 10.77% to reach the $40 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 Plum Creek Timber Co., Inc., looking at the dividend history chart for PCL 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 3.9% annualized dividend yield.

PCL+Dividend+History+Chart

Below is a chart showing the trailing twelve month trading history for Plum Creek Timber Co., Inc., and highlighting in green where the $40 strike is located relative to that history:

Loading+chart++2014+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 February 2015 put at the $40 strike for the 4.2% annualized rate of return represents good reward for the risks. We calculate the trailing twelve month volatility for Plum Creek Timber Co., Inc. (considering the last 252 trading day closing values as well as today's price of $44.70) to be 18%. For other put options contract ideas at the various different available expirations, visit the PCL Stock Options page of StockOptionsChannel.com.

More from Stocks

Jim Cramer: Union Pacific Is Positive on NAFTA Talks

Jim Cramer: Union Pacific Is Positive on NAFTA Talks

Jim Cramer: I Remain Constructive on Micron Shares

Jim Cramer: I Remain Constructive on Micron Shares

Imagining the Stock Market in 10 Years

Imagining the Stock Market in 10 Years

Video: Jim Cramer on Why the Market Opened Lower on Wednesday

Video: Jim Cramer on Why the Market Opened Lower on Wednesday

Video: Jim Cramer on the Markets, Tiffany, Micron Technology and Union Pacific

Video: Jim Cramer on the Markets, Tiffany, Micron Technology and Union Pacific