Commit To Purchase American Vanguard Corp. At $12.50, Earn 11.2% Annualized Using Options

Investors eyeing a purchase of American Vanguard Corp. (AVD) stock, but tentative about paying the going market price of $15.00/share, might benefit from considering selling puts among the alternative strategies at their disposal. One interesting put contract in particular, is the May 2017 put at the $12.50 strike, which has a bid at the time of this writing of 75 cents. Collecting that bid as the premium represents a 6% return against the $12.50 commitment, or a 11.2% 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 AVD'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 $12.50 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 American Vanguard Corp. sees its shares fall 17.2% and the contract is exercised (resulting in a cost basis of $11.75 per share before broker commissions, subtracting the 75 cents from $12.50), the only upside to the put seller is from collecting that premium for the 11.2% annualized rate of return.

Interestingly, that annualized 11.2% figure actually exceeds the 0.3% annualized dividend paid by American Vanguard Corp. by 10.9%, based on the current share price of $15.00. 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 17.22% to reach the $12.50 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 American Vanguard Corp., looking at the dividend history chart for AVD 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 0.3% annualized dividend yield.

AVD+Dividend+History+Chart

Below is a chart showing the trailing twelve month trading history for American Vanguard Corp., and highlighting in green where the $12.50 strike is located relative to that history:

Loading+chart++2016+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 May 2017 put at the $12.50 strike for the 11.2% annualized rate of return represents good reward for the risks. We calculate the trailing twelve month volatility for American Vanguard Corp. (considering the last 253 trading day closing values as well as today's price of $15.00) to be 51%. For other put options contract ideas at the various different available expirations, visit the AVD Stock Options page of StockOptionsChannel.com.

In mid-afternoon trading on Friday, the put volume among S&P 500 components was 680,315 contracts, with call volume at 680,315, for a put:call ratio of 0.71 so far for the day, which is above normal compared to the long-term median put:call ratio of .65. In other words, if we look at the number of call buyers and then use the long-term median to project the number of put buyers we'd expect to see, we're actually seeing more put buyers than expected out there in options trading so far today. Find out which 15 call and put options traders are talking about today.

More from Stocks

The Stock Market Has Every Reason to See a Fresh Rally

The Stock Market Has Every Reason to See a Fresh Rally

3 Simple Tips on Investing From TheStreet's Jim Cramer

3 Simple Tips on Investing From TheStreet's Jim Cramer

Video: There Are Some Big Changes Coming to the PGA Championships in 2019

Video: There Are Some Big Changes Coming to the PGA Championships in 2019

Tesla's Supercharger Network Is Booming -- Here's Why That's a Concern

Tesla's Supercharger Network Is Booming -- Here's Why That's a Concern

Attention 60 Minutes: Google Isn't the Only Big-Tech Monopoly

Attention 60 Minutes: Google Isn't the Only Big-Tech Monopoly