We are sharing an attractive income-generating options trade that exists because of current market conditions. Specifically, after completing a major portfolio restructuring in recent years, healthy-dividend healthcare REIT HCP is now well-positioned for strong income in the years ahead, but has recently sold-off thereby creating an attractive income-generating options trade opportunity. We believe this is an attractive trade to place today, and potentially tomorrow, as long as the share price doesn’t move too dramatically before then.
The Trade:
Selling Put Options on HCP Inc (HCP) with a strike price of $32.50 (just 3.7% out of the money), and expiration date of October 18, 2019, and for a premium of $0.35 (this comes out to approximately 12.9% of extra income on an annualized basis, ($0.35/$32.50 x 12 months). This trade not only generates attractive income for us now, but it gives us the possibility of owning shares of HCP at an even lower price if the shares fall even further than they already recently have, and they get put to us (and we’d be happy to own HCP, especially if it falls to a purchase price of $32.50 per share).
Your Opportunity:
We believe this is an attractive trade to place today and potentially tomorrow as long as the price of HCP doesn't move dramatically before then, and as long as you’re able to generate annualized premium (income for selling, divided by strike price, annualized) of approximately 10-15%, or greater.
Our Thesis:
In a nutshell, our thesis is that HCP is an attractive healthy dividend healthcare REIT with lots of long-term income and steady growth potential ahead. In fact, we recently wrote in great deal about the attractiveness of HCP in this report. However, short-term volatility has caused the share price to sell-off. And rather than simply buying shares right now, we believe this options trade is attractive because it generates healthy upfront income for you that you get to keep no matter what, and it also gives you the possibility of purchasing these share at ab even lower (more attractive) price if the price falls even further and the shares get put to you before the options contract expires. Worth noting, when volatility goes up, the premium income available for selling put options also usually goes up. And it is the recent sell-off in HCP (over the last week) that makes the premium income on this trade increasingly attractive.
Important Trade Considerations:
Two important considerations when selling put options are dividends and earnings announcements because they can both impact the price and thereby impact your trade. In this particular case, both are largely a non-issue. First, HCP isn’t expected to go ex-dividend until the beginning of November—after this options contract has already expired. And with regards to earnings, HCP isn’t expected to announce earnings again until October 31st (also after this options contract expires). Had either of these events happened prior to this option trade’s expiration, we’d have to take a closer look at the potential impacts on the trade.
Conclusion:
HCP is an attractive long-term investment thanks to its restructured business, it's healthy dividend, and its ongoing growth opportunities. However, it is facing uncertainty and sell-pressure in the short-term (over the last week. High premium income is available for placing this trade, especially for a durable dividend REIT. If the shares get put to us--we're happy to hold them for the long-term. If the put options are not executed, then we're happy to simply keep the high premium income available for selling this put.