How To YieldBoost RGR From 1.6% To 14.5% Using Options

Shareholders of Sturm, Ruger & Co., Inc. (RGR) looking to boost their income beyond the stock's 1.6% annualized dividend yield can sell the April 2015 covered call at the $37.50 strike and collect the premium based on the $1.40 bid, which annualizes to an additional 12.9% rate of return against the current stock price (at Stock Options Channel we call this the YieldBoost), for a total of 14.5% annualized rate in the scenario where the stock is not called away. Any upside above $37.50 would be lost if the stock rises there and is called away, but RGR shares would have to climb 5.9% from current levels for that to occur, meaning that in the scenario where the stock is called, the shareholder has earned a 9.9% 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 Sturm, Ruger & Co., Inc., looking at the dividend history chart for RGR 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 1.6% annualized dividend yield.

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Below is a chart showing RGR's trailing twelve month trading history, with the $37.50 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 April 2015 covered call at the $37.50 strike gives good reward for the risk of having given away the upside beyond $37.50. ( Do most options expire worthless? This and six other common options myths debunked). We calculate the trailing twelve month volatility for Sturm, Ruger & Co., Inc. (considering the last 252 trading day closing values as well as today's price of $35.20) to be 35%. For other call options contract ideas at the various different available expirations, visit the RGR Stock Options page of StockOptionsChannel.com.

In mid-afternoon trading on Friday, the put volume among S&P 500 components was 300,730 contracts, with call volume at 501,901, for a put:call ratio of 0.60 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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