How To YieldBoost AIR From 0.9% To 8.8% Using Options
June 23, 2015 at 11:43 AM EDT
Shareholders of AAR Corp (AIR) looking to boost their income beyond the stock's 0.9% annualized dividend yield can sell the February 2016 covered call at the $35 strike and collect the premium based on the $1.65 bid, which annualizes to an additional 7.9% rate of return against the current stock price (at Stock Options Channel we call this the YieldBoost), for a total of 8.8% annualized rate in the scenario where the stock is not called away. Any upside above $35 would be lost if the stock rises there and is called away, but AIR shares would have to advance 10.5% from current levels for that to occur, meaning that in the scenario where the stock is called, the shareholder has earned a 15.7% return from this trading level, in addition to any dividends collected before the stock was called.