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Sector Sell-Off Wave Creates Attractive High Income


We’re sharing a new high-income-generating options trade. Last’s week’s volatility created a significant dispersion in sector performance, and the name behind this trade was one of the more extreme movers. If shares of this big-dividend REIT fall further, we’d be happy to buy at an even lower price. And we get to keep the attractive premium income this trade generates, no matter what.

The Trade:


Selling PUT Options on Medical Properties Trust (MPW) with a strike price of $17 (2% out of the money), and expiration date of May 17, 2019, and for a premium of $0.25. That’s an extra 17.6% income for us on an annualized basis (0.25 / 17) x 12 months). If the shares get put to us before the options contract expires then we're happy to buy the shares of this big dividend yield (5.8%) healthcare REIT at the lower price of $17. And if the shares don't get put to us, we still get to keep the extra income we generated no matter what.


Your Opportunity:

We believe this is an attractive trade to place today and potentially tomorrow as long as the price of Medical Properties 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%, or greater.


Our Thesis:

We wrote about MPW on Saturday, noting it was one of the biggest victims of the indiscriminate sell-off in both healthcare stocks and REITs (check out that article for details). Some market pundits tried to make up a narrative for the sell-off (for example this article suggests it was all about changing interest rate expectations) however it’s hard to realistically attribute the size and timing of the sell-off simply to constantly changing interest rate expectations. As we described in the previous article, MPW remains a well-rated big-healthy-dividend REIT, and it now trades at an even more attractive price. Thus, the attractiveness of this trade, in our view. In particular, the premium income available on this trade is bigger than normal (thanks to last week’s volatility) and especially attractive for a big-dividend REIT, like MPW.

Important Trade Considerations:

Two important considerations when placing options trades are upcoming earnings announcements and dividend dates because they can increase volatility and dramatically impact the value of your options contract in unexpected ways. And in the case of MPW, the company is expected to announce earnings on May 6th (which is BEFORE this options contract expires) and this could have an impact on the results of this trade (volatility tends to increase when earnings is announced because new information is coming out). This increases the likelihood that these shares could actually get put to us, which is fine (given the attractiveness of MPW).

And regarding the dividend, MPW isn’t expected to go ex-dividend agaom until early June (AFTER our options contract expires), so the impact of the dividend on this trade is not a concern for us.

Cash Secured Or Margin:

If you're going to place this trade, you'll need to keep enough cash in your account to cover the cost of the shares if they do get put to you. Options trade in lots of 100, so you'll need too keep at least $1,700 of cash on hand for each contract trades ($17 strike price times 100 shares). The other alternative, if your account is approved for margin, you don't need to keep the cash on hand, but if the shares do get put to you then you'll buy them with borrowed money (on margin), and there is a cost to that (currently around 2.7% annual interest charge at Interactive Brokers, for example).


Medical Properties Trust is an attractive big-dividend healthcare REIT that got caught up in last week’s indiscriminate sell-off of REITs and healthcare stocks. Despite what media pundits may try to tell you—we view this volatility as mostly noise, and the sell-off makes the valuation of MPW even more attractive. However, rather than buying the shares outright, we’ve elected to sell income-generating put options. This differentiated income-generating strategy provides us attractive upfront premium income now, and it gives us a margin of safety too—if the shares fall further (to our strike price or below, prior to the option expiration next month) then we’re happy to own shares of Medical Properties Trust at an even lower price.

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