A lot of people believe the market is due for another leg down in the short-term. We acknowledge that risk is on the table, but no one can predict short-term market moves (if they tell you they can—just know they cannot). However, if you like generating big upfront income, that also gives you a chance to own an attractive big-dividend business at an even lower price, then you may want to consider this trade. We believe the trade highlighted in this article is an attractive one to place today, and potentially over the next few days, as long as the underlying stock price doesn’t move dramatically before then.
Triton International (TRTN)
Triton International (TRTN) is an attractive intermodal shipping container company, and its share price has been battered by the economic impacts of the pandemic. However, the company’s longer-term leases and business/financial strength versus peers are encouraging. Not to mention, management has been buying back a significant amount of shares. We currently own preferred shares of Triton (TRTN-A), and we’d be happy to own the common shares too (per the following trade). We recently wrote a detailed report about the common and preferred shares here.
The Trade:
Sell Put Options on Triton International (TRTN) with a strike price of $22.50 (~20% out of the money), and an expiration date of June 19, 2020, and for a premium of at least $0.35 (this comes out to approximately +18.6% of extra income on an annualized basis, ($0.35/$22.50 x (12 months, annualized). This trade not only generates attractive income for us now, but it gives us the possibility of owning shares of TRTN 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 TRTN, especially if it falls to a purchase price of $22.50 per share.
Note: If you want higher upfront income, and a higher chance of having the shares put to you, consider selling the $25 puts instead.
Your Opportunity:
We believe this is an attractive trade to place today and potentially over the next few days as long as the price of TRTN doesn't move too dramatically before then, and as long as you’re able to generate annualized premium (income for selling, divided by strike price, annualized) of approximately 15-18% or greater.
Our Thesis:
Our thesis is basically that short-term fear is creating an attractive opportunity in the options market. Specifically, we like Triton’s business as a long-term big-dividend investment, but near term fear has created a lot of volatility and a much lower stock price. However, this increased fear and volatility also increases the amount of upfront premium income available in the options market. And if you like generating big upfront income, that also gives you a chance to own an attractive big-dividend business at an even lower price, then you may want to consider this trade.
Please also keep in mind, options contracts trade in lots of 100, so to secure this trade with cash (in case the shares get put to you and you have to buy them) you’ll need to keep $22.50 times 100 on hand (the strike price times an options contract lot of 100). You’ll also need to be comfortable holding that many shares in your account from a position-sizing / risk management standpoint.
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, earnings are largely a non-issue because TRTN won’t announce again after this contract expires. However, TRTN does start trading ex-dividend on June 10th. Given the large amount of premium on this trade, we are comfortable with the impact of the dividend. Further, again, if you want significantly higher upfront income and a higher change of having the shares put to you, consider the $25 strike price too.
Conclusion:
TRTN is an attractive long-term investment in our view. We currently own the preferred shares (TRTN.PA), and we’d be happy to own the common shares at a low price of $22.50. We believe TRTN common shares present an attractive long-term investment opportunity at the current price, however if you’re uncertain about pulling the trigger on a normal buy order, you might consider this trade instead. It allows you to generate attractive upfront income that you get to keep no matter what. And this options trade also gives you a chance of picking up shares of this attractive long-term big-dividend-payer at an even lower price, if the shares fall even further than they already have, and they get put to you at $22.50. And at a price of $22.50, TRTN is an extremely attractive long-term investment.