We live in nervous times. The stock market is coming off new records yet most traders have one foot out the door at all times. Fixed income offers generational low returns. Money printing (QE programs) is steadily devaluing cash. Global warfare and terrorism are in the headlines every day.
No matter how you feel about all of those major concerns … you still need to do something with your money.
Risk averse people might want to consider selling puts using low-volatility (beta: 0.75), relatively high-yielding (5.41%) AT&T Corp (T, Financial) as your underlying security.
AT&T is as steady as it gets in the equity market. Most holders own it only for the dividend, which has grown by around 4.5% annualized over the past decade. Quarterly payments have historically been raised during the first quarter of each year.
AT&T’s earnings per share are expected to come in at about $2.60 this year rising to about $2.72 in 2015. At Monday morning’s quote of $35.43 the stock was selling for 13.6x this year’s and about 13.0x the company’s 2015 estimate.
That puts T at a slight discount to its 10-year median P/E of 14x. It occasionally has rallied to higher multiples than that. The shares peaked at $38.60 in 2012, $39, on the nose, in 2013 and $37.48 in late July this summer.
From today’s quote there appears to be very little risk and only moderate upside, excluding the dividend.
That is an attractive set up for selling longer-term puts. I was able to get $3.90 per share for close-to-the-money AT&T Jan. 2016, $35 strike price put options.
$3.90 seemed like a great premium. It reduces the 'if exercised' price to just $31.10, a level that hasn't been seen at all during the previous two full years.
The best-case scenario, keeping 100% of the cash received, will play out if AT&T simply closes at $35 or better on the option’s expiration date. The worst case result would be the forced purchase of 100 AT&T shares per contract sold, at a multi-year low.
At the "if put" price, the current yield would be 5.92% even without next year’s expected increase. That $31.10 entry point would also translate into less than 11.5x next year’s estimate, an 18% discount to the firm’s typical multiple.
Think about it. Outright buyers of the stock like it for the $1.84 in annual distributions. They have to wait four quarters to collect that amount. Sellers of the put option described get paid more than twice that amount right up front while establishing a 12% margin of safety that share owners don’t get.
Writing conservative options beats the pants off earning a few basis points at the bank while waiting for “the next 2008.” Many traders have inadvertently sat out the entire bull market on that basis.
Hang up on the naysayers and start making some money.
Disclosure: Short AT&T Jan. 2016 $35 puts
