The current financial headwinds abound:
The stock market may be heading for a seventh consecutive week of losses ...
The BRIC nations are trying to stave off inflation by tightening monetary policy, which is in turn putting a squeeze on commodities and risk assets ...
The PIIGS across the pond are up to their ears in a large pile of debt laden slop that's sending capital on a flight to quality.
The last several rounds of economic data show a deceleration in the momentum of the economic recovery (is it a soft patch, or the start of another recession cycle?) ...
The European Union is trying to figure out how they can throw more money at Greece without triggering a "credit event" default that would send shock waves throughout the global banking system ...
Leading financial institutions, including the World Bank, have turned less optimistic on global and U.S. GDP growth for 2011 ...
And the Federal Reserve continues to be pinned-up against the wall and sees no choice but to maintain an ultra loose monetary policy for an "extended period", meaning that interest rates will continue to stay at rock bottom heading into 2012.
What does that mean for all you savers, fixed income savants, and income-oriented investors that are thirsty for yield?
You'll have to scrounge hard for your scratch.
In fact, the 10 year US Treasury Bond is once again yielding below 3.00%. And if the headwinds persist and this soft patch materializes into a prolonged malaise, yields could go even lower.
Investors have been desperate for any type of yield and safety as the 5 year U.S. Treasuries are being scooped up at a yield of 1.55%. The CPI report just released yesterday showed that core inflation is now running year over year at 1.50% and is trending higher, essentially sticking it to these investors (can you say "negative real yield?).
What's an investor thirsty for yield in the current market environment to do?
The answer is to find value on sale, and with the recent equity market sell-off, the discounts are abundant. The secret is to be a smart and savvy shopper, and you can find great yielding gems and, even better, construct a high yielding position using an easy option strategy that will generate a high annualized rate of returns.
Here's the option strategy, and I'll even reveal a gem ...
The first thing we need to do is find the gem.
What we're looking for is a rock solid investment that has an excellent track record with a promising product line or service, has a fortress-like balance sheet, generates lots of free cash flow, gives off a juicy dividend, and best of all has pulled back with the rest of the broad market during this recent sell-off.
After our diligent search, we find a great a prospect. The company is Verizon Communications Inc. (Symbol: VZ). The stock closed yesterday at 35.12, and is nearly 9% off its recent high.
VZ has an annual dividend of 1.95 per share, distributed quarterly, and it's currently yielding 5.5%. Not too bad compared to the sub 3% yield on 10 year Treasuries.
But can we do even better? Let's dig a little deeper ...
Verizon is a leader in its field, and recently picked up the Apple i-phone smart phone line that it can now offer to its subscribers. They also have added a wide array of tablet computers into their product line, which have been taking significant market share from PC's and laptops. Financially, the company is on firm footing, and the stock price has pulled back considerably with the rest of the market.
Technically, the stock is approaching its 200 day moving average (green line below), and it looks like the price action is trying to consolidate and find a bottom around this level.
Instead of purchasing VZ right here at 35.12, consider selling a PUT option contract as an alternative. As a PUT option seller, we obligate ourselves to purchase shares of VZ stock at a specific price known as the strike price by a certain date known as the expiration date.
For obligating ourselves, we get paid a premium or the sale price of the PUT option. Every PUT Option contract you sell is equivalent to 100 shares of obligation.
So, if you were inclined to purchase 1000 shares, you may opt to sell 10 PUT Option contracts instead.
Here's the trade:
With VZ trading at 35.12, you can sell the VZ OCT 33 PUT Option for 1.16, and you would receive $116 in premium per contract you sell.
If VZ stays above $33 per share by October expiration, which is in 129 days, you would keep the entire premium. When you do the math, the annualized rate of return or the yield will be 10.3%. The stock price would have to drop another 6% from here before dropping below your strike price (shown by the red horizontal line).
If VZ does indeed trade lower, even below your strike price, you may be obligated to purchase VZ stock at $33 per share. Would this scenario be so bad?
Since you took in a credit of 1.16 and, in the event you get the stock put to you, your effective cost basis is reduced by the amount of the credit, essentially the breakeven for your purchase transaction would be $31.84 -- or 9% lower from here! (Shown by the horizontal blue line) And with the 1.95 annual dividend distributions, your effective yield based on your cost basis jumps to 6.1% from the current yield of 5.5%
Can Uncle Sam's finest paper do this for you? If you like a 10.3% yield or perhaps owning VZ at a break even cost of 31.84 yielding 6.1%, you should certainly consider this Big Gulp strategy to quench your thirst for yield.
The stock market may be heading for a seventh consecutive week of losses ...
The BRIC nations are trying to stave off inflation by tightening monetary policy, which is in turn putting a squeeze on commodities and risk assets ...
The PIIGS across the pond are up to their ears in a large pile of debt laden slop that's sending capital on a flight to quality.
The last several rounds of economic data show a deceleration in the momentum of the economic recovery (is it a soft patch, or the start of another recession cycle?) ...
The European Union is trying to figure out how they can throw more money at Greece without triggering a "credit event" default that would send shock waves throughout the global banking system ...
Leading financial institutions, including the World Bank, have turned less optimistic on global and U.S. GDP growth for 2011 ...
And the Federal Reserve continues to be pinned-up against the wall and sees no choice but to maintain an ultra loose monetary policy for an "extended period", meaning that interest rates will continue to stay at rock bottom heading into 2012.
What does that mean for all you savers, fixed income savants, and income-oriented investors that are thirsty for yield?
You'll have to scrounge hard for your scratch.
In fact, the 10 year US Treasury Bond is once again yielding below 3.00%. And if the headwinds persist and this soft patch materializes into a prolonged malaise, yields could go even lower.
Investors have been desperate for any type of yield and safety as the 5 year U.S. Treasuries are being scooped up at a yield of 1.55%. The CPI report just released yesterday showed that core inflation is now running year over year at 1.50% and is trending higher, essentially sticking it to these investors (can you say "negative real yield?).
What's an investor thirsty for yield in the current market environment to do?
The answer is to find value on sale, and with the recent equity market sell-off, the discounts are abundant. The secret is to be a smart and savvy shopper, and you can find great yielding gems and, even better, construct a high yielding position using an easy option strategy that will generate a high annualized rate of returns.
Here's the option strategy, and I'll even reveal a gem ...
The first thing we need to do is find the gem.
What we're looking for is a rock solid investment that has an excellent track record with a promising product line or service, has a fortress-like balance sheet, generates lots of free cash flow, gives off a juicy dividend, and best of all has pulled back with the rest of the broad market during this recent sell-off.
After our diligent search, we find a great a prospect. The company is Verizon Communications Inc. (Symbol: VZ). The stock closed yesterday at 35.12, and is nearly 9% off its recent high.
VZ has an annual dividend of 1.95 per share, distributed quarterly, and it's currently yielding 5.5%. Not too bad compared to the sub 3% yield on 10 year Treasuries.
But can we do even better? Let's dig a little deeper ...
Verizon is a leader in its field, and recently picked up the Apple i-phone smart phone line that it can now offer to its subscribers. They also have added a wide array of tablet computers into their product line, which have been taking significant market share from PC's and laptops. Financially, the company is on firm footing, and the stock price has pulled back considerably with the rest of the market.
Technically, the stock is approaching its 200 day moving average (green line below), and it looks like the price action is trying to consolidate and find a bottom around this level.
(Click on image to enlarge)
Now that we've found our gem, consider this options strategy
to boost your returns.Instead of purchasing VZ right here at 35.12, consider selling a PUT option contract as an alternative. As a PUT option seller, we obligate ourselves to purchase shares of VZ stock at a specific price known as the strike price by a certain date known as the expiration date.
For obligating ourselves, we get paid a premium or the sale price of the PUT option. Every PUT Option contract you sell is equivalent to 100 shares of obligation.
So, if you were inclined to purchase 1000 shares, you may opt to sell 10 PUT Option contracts instead.
Here's the trade:
With VZ trading at 35.12, you can sell the VZ OCT 33 PUT Option for 1.16, and you would receive $116 in premium per contract you sell.
If VZ stays above $33 per share by October expiration, which is in 129 days, you would keep the entire premium. When you do the math, the annualized rate of return or the yield will be 10.3%. The stock price would have to drop another 6% from here before dropping below your strike price (shown by the red horizontal line).
If VZ does indeed trade lower, even below your strike price, you may be obligated to purchase VZ stock at $33 per share. Would this scenario be so bad?
Since you took in a credit of 1.16 and, in the event you get the stock put to you, your effective cost basis is reduced by the amount of the credit, essentially the breakeven for your purchase transaction would be $31.84 -- or 9% lower from here! (Shown by the horizontal blue line) And with the 1.95 annual dividend distributions, your effective yield based on your cost basis jumps to 6.1% from the current yield of 5.5%
Can Uncle Sam's finest paper do this for you? If you like a 10.3% yield or perhaps owning VZ at a break even cost of 31.84 yielding 6.1%, you should certainly consider this Big Gulp strategy to quench your thirst for yield.
39 votes
Thank you for voting!
Comments: