The current dividend yield on Royal Dutch Shell is 7.22% - Some of the highest yields out there. Combining this with a similar yield on the 7% OTM put, and topping it off with additional income from selling an OTM call, brings in an exceptional annualized yield in excess of 15%. The risk is to be long an oil asset in an uncertain oil environment. However, this is mitigated by the blue chip status of the exploration giant, as well as the over-sized dividend yield. I size the trade to the minimum options contract size (100 shares), but any multiple of that would work. I use actual prices from a trade just effected for a client.
STRATEGY
1. Buy 100 shares of RDSA at 23.80 Euros/share
2. Sell 1 RDSA 15JUN18 E22 PUT at 1.52 Euros/share
3. Sell 1 RDSA 15JUN18 E26 CALL at 0.48 Euros/share
INCOME
1. Options premium cashed in at maturity = 1.52 + 0.48 = 2.00 Euros/share
2. Indicative annual dividend to be cashed in = 1.72 Euros/share
3. Total cashed in annually = 2.00 + 1.72 = 3.72 Euros/share
YIELD
1. Yield from options premium = 2.00/23.80 = 8.40%
2. Yield from dividend = 1.72/23.80 = 7.22%
3. Total income yield = 15.62%
OTHER
This strategy is also available in USD and GBP. If the stock goes down to the strike level and the shares are assigned to the investor, one would end up being long RDSA at a net price of 20.90 Euros/share (purchase price of the shares, less income from options and dividends in the first year) which is some 13% below the current price. On the up side, assuming the shares reach the call strike and the investor is assigned and delivers the shares at 26.00, the profitability of the strategy would be 9.25% excluding any accrued dividends at the time of assignment, and excluding the accrued value of the options premia at the time of assignment.
STRATEGY
1. Buy 100 shares of RDSA at 23.80 Euros/share
2. Sell 1 RDSA 15JUN18 E22 PUT at 1.52 Euros/share
3. Sell 1 RDSA 15JUN18 E26 CALL at 0.48 Euros/share
INCOME
1. Options premium cashed in at maturity = 1.52 + 0.48 = 2.00 Euros/share
2. Indicative annual dividend to be cashed in = 1.72 Euros/share
3. Total cashed in annually = 2.00 + 1.72 = 3.72 Euros/share
YIELD
1. Yield from options premium = 2.00/23.80 = 8.40%
2. Yield from dividend = 1.72/23.80 = 7.22%
3. Total income yield = 15.62%
OTHER
This strategy is also available in USD and GBP. If the stock goes down to the strike level and the shares are assigned to the investor, one would end up being long RDSA at a net price of 20.90 Euros/share (purchase price of the shares, less income from options and dividends in the first year) which is some 13% below the current price. On the up side, assuming the shares reach the call strike and the investor is assigned and delivers the shares at 26.00, the profitability of the strategy would be 9.25% excluding any accrued dividends at the time of assignment, and excluding the accrued value of the options premia at the time of assignment.