YieldBoost Rent-A-Center To 12.9% Using Options

Shareholders of Rent-A-Center Inc. ( RCII) looking to boost their income beyond the stock's 3.3% annualized dividend yield can sell the December covered call at the $30 strike and collect the premium based on the 85 cents bid, which annualizes to an additional 9.6% rate of return against the current stock price (at Stock Options Channel we call this the YieldBoost), for a total of 12.9% annualized rate in the scenario where the stock is not called away. Any upside above $30 would be lost if the stock rises there and is called away, but RCII shares would have to advance 6.7% from current levels for that to occur, meaning that in the scenario where the stock is called, the shareholder has earned a 9.7% 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 Rent-A-Center Inc., looking at the dividend history chart for RCII 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 3.3% annualized dividend yield.


Below is a chart showing RCII's trailing twelve month trading history, with the $30 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 December covered call at the $30 strike gives good reward for the risk of having given away the upside beyond $30. ( Do most options expire worthless? This and six other common options myths debunked). We calculate the trailing twelve month volatility for Rent-A-Center Inc. (considering the last 252 trading day closing values as well as today's price of $28.18) to be 36%. For other call options contract ideas at the various different available expirations, visit the RCII Stock Options page of StockOptionsChannel.com.

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