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Options Trade: Attractive REIT Income, Compelling Price Action

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We just placed a new high-income-generating options trade. Near-term technicals are creating an attractive opportunity to generate income on a big-dividend REIT. 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:

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We Sold PUT Options on Omega Healthcare Investors (OHI) with a strike price of $36 (just 5.7% out of the money), and an expiration date of February 15th, 2019, and for a premium of $0.35. If the shares get put to us then we’re happy to pick them up at only $36, and whether or not they get put to us, we’re happy to keep the 11.7% extra income (on an annualized basis) no matter what (0.35/36 x 12 months = 11.7%).

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Important Trade Note:

We previously sold covered calls on our position in Omega Healthcare, and those calls were exercised on Friday 1/19. Specifically, our shares of Omega were called away from us. You can read all the details of that successful income-generating call option sale here. And because the shares were called away from us, we are now comfortable writing these new income-generating put options.

Your Opportunity:

We believe this is an attractive trade to place today and potentially tomorrow as long as the price of Omega 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 10-12%, or greater.

Our Thesis:

Omega (a healthcare REIT focused on skilled nursing facilities) is an attractive long-term investment for income-focused investors thanks to it big dividend payments (it currently yields 6.9%) and due to the strong demographic tailwinds on its side (i.e. an aging population and growing healthcare needs). Following lower uncertainty about the financial viability of several of its large healthcare facility operators, Omega shares have been rebounding dramatically over the last 6 months, as shown in the following chart.

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Our Long-Term View on Omega:

From a valuation standpoint, the price is not exorbitant, but it is getting ahead of Wall Street analyst price targets, as shown in the above chart (the average price target of the 10 analysts covering the stock is below the current share price). We believe Omega will continue to strengthen over time (as we have written about previously in detail HERE), and management will eventually resume its history of dividend increases. However, in the short-term Omega may be getting ahead of itself.

Our Near-Term Technical View On Omega:

Omega’s near-term technical indicators are approaching "very overbought" levels. For example, here is a look at Omega’s price versus its moving average share price over varying recent time periods, and as compared to a broader REIT index, as well as compared to the broader equity market as measured by the S&P 500 (SPY), and a couple popular “safe” blue chip healthcare REITs (VTR and WELL).

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For example, when compared to its own moving average price over various time periods, the S&P 500 is somewhat reasonably priced, particularly when compared to the REIT index (XLRE) which is generally a “flight-to-quality” asset that performs relatively well when the rest of the market has been experiencing heightened volatility, as it has been since the start of the fourth quarter (you can see this same phenomenon for popular flight-to-quality REITS Ventas and Welltower, particularly with regards to their 3-month performance). However, Omega is experiencing even more dramatic technical strength as it has benefited from being a REIT (flight to quality asset class) and it has benefited from positive fundamental news with regards to several of its operators. These positive forces have driven the near-term Omega price dramatically higher—perhaps even getting a little ahead of itself from both a technical standpoint and in particular as compared to analyst estimates.

Important Trade Considerations:

Two important trade considerations when placing options trades on individual securities are the ex-dividend date (the date the shares begin trading without the dividend) and the earnings announcement date because they can both impact the value of the underlying stock and the value of your options trade. And in the case of Omega, both are important. First, Omega starts trading ex-dividend on January 30th (the quarterly dividend is $0.66), and this will reduce the price of the shares. Second, Omega is expected to announce earnings on February 11th. This earnings announcement adds uncertainty and volatility (both up or down) to the share price, and it is part of the reason why the premium income on this options trade is attractive (premium income available is higher when market uncertainty is higher).

Conclusion:

We like Omega as a long-term investment due to demographics, fundamentals and the growing need for healthcare (as described in our report link provided earlier). However, rather than purchasing more shares now, we’ve elected to generate income now by selling put options (thereby collecting the premium income), and we’ll gladly purchase shares of this attractive long-term investment if the share price falls and the shares get put to us at $36 before the options contract expires. Worth mentioning, it is because of the heightened market wide uncertainty, and the heightened Omega-specific uncertainty, that the premium income currently available for selling the put options is attractive (when uncertainty is higher, so too is the premium income available). Also important, we wouldn’t be willing to collect this premium income if we didn’t think Omega was an attractive long-term investment. This trade is another diversified strategy for generating income.

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