How To YieldBoost GRC From 1.2% To 11.7% Using Options

Shareholders of Gorman-Rupp Co. (GRC) looking to boost their income beyond the stock's 1.2% annualized dividend yield can sell the March 2015 covered call at the $35 strike and collect the premium based on the $1.20 bid, which annualizes to an additional 10.5% rate of return against the current stock price (at Stock Options Channel we call this the YieldBoost), for a total of 11.7% annualized rate in the scenario where the stock is not called away. Any upside above $35 would be lost if the stock rises there and is called away, but GRC shares would have to advance 7.2% from current levels for that to happen, meaning that in the scenario where the stock is called, the shareholder has earned a 10.9% 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 Gorman-Rupp Co., looking at the dividend history chart for GRC 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 1.2% annualized dividend yield.

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Below is a chart showing GRC's trailing twelve month trading history, with the $35 strike highlighted in red:

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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 March 2015 covered call at the $35 strike gives good reward for the risk of having given away the upside beyond $35. ( Do most options expire worthless? This and six other common options myths debunked). We calculate the trailing twelve month volatility for Gorman-Rupp Co. (considering the last 252 trading day closing values as well as today's price of $32.65) to be 37%. For other call options contract ideas at the various different available expirations, visit the GRC Stock Options page of StockOptionsChannel.com.

In mid-afternoon trading on Wednesday, the put volume among S&P 500 components was 530,206 contracts, with call volume at 939,868, 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.

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