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A Different Type of Income Opportunity

From time-to-time, we like to share different types of income-generating investment opportunities for members to consider. And while the opportunity in this article is not for everyone, it is compelling for some, especially in the current market environment.

The opportunity we are referring to is selling out-of-the-money put options (to generate premium income upfront) on the shares of a high-dividend stock that we wouldn't mind owning if the share price falls even lower than it already recently has, and the shares get "put" to us (i.e. if the person we sold the put option to, puts the shares to us at the predetermined strike price before the options contract expires. And given the high level of volatility we've been experiencing in the market over the last week, the premium income available is very attractive (the premium income available increases when market volatility increases--as it has over the last week.

Without further ado, here is the trade opportunity...

The Trade:

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Attractive income is currently available for selling put options on Triton International (TRTN) with a strike price of $30.00 (7.2% out of the money), and expiration date of February 16, 2018, and for a premium of $0.75 (this comes out to approximately 30.0% of extra income on an annualized basis, ($0.75/$30 x 12months). This trade not only generates attractive income up front, but it gives you the possibility of owning shares of Triton at an even lower price if the shares fall even further than they already recently have, and they get put to you (and theoretically, you should be happy to own Triton, especially if it falls to a purchase price of $30 per share--Triton currently trades at around $32.36 after the recent selloff).

Your Opportunity:

We believe this is an attractive trade to place today and potentially tomorrow as long as the price of TRTN 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 15%-30%, or greater.

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Our Thesis:

As we wrote about in this article, Triton is the leader in the strengthening intermodal shipping industry (Triton makes the ubiquitous steel boxes used on ships, trains and trucks), and the recent marketwide sell off has created a very compelling high income opportunity. Specifically, because Triton is tied to overall economic strength (there's more demand for shipping containers when the economy is strong) it is a higher beta stock (even though it offers a 5.6% dividend yield), and as the market has sold off over the last week, Triton has sold off dramatically more (like the market, Triton was due for a healthy selloff). However, we do not believe the recent sell off is an indication we're heading into a recession. Rather, we believe it's a blip on the radar screen as the overall economy remains strong. We expect Triton to remain strong, as we wrote about Triton in these two recent reports:

Asset Allocation and Risk Management:

This type of trade is not for everyone. However, if you're going to consider this trade, we recommend selling an amount of options not greater than 2-4% of your investment portfolio if the shares get put to you and you're required to purchase them. For example, if your investment portfolio is worth $100,000, and you sell one Triton put contract (each contract equates to 100 shares) then if the shares get put to you at $30 you're required to pay $3,000 to buy them ($30 x 100), and $3,000 is 3% of your 100,000 investment portfolio. This is a very attractive income generating opportunity, but this type of trade is not for everyone.

Final Thoughts:

Triton International is the leading intermodal shipping container company, it benefits from economies of scale and vast customer relationships, and it has a lot of upside price appreciation potential as the economy remains strong. It also offers a large 5.6% dividend yield. The recent bout of volatility in the market has created this attractive opportunity to generate very high income. Based on the expiration date of this option, we don't have to worry about the dividend (it was already paid) or earnings (TRTN announces after this option expires). If these shares get put to you, you should be happy to own Triton at a very low price. And if the shares don't get put to you then you should be happy to simply keep the very large income you generate for selling these shares.

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