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STAG Options Trade: Fear-Driven Sell-Off, High Income Opportunity

As we recently wrote about in detail here, Stag Industrial (STAG) pays big monthly dividends (5.1% yield) and it has “more octane” than other REITs. The “octane” generally makes Stag shares go up more when the market is strong, healthy and calm, but down more (compared to other REITs) when the market sells off. And the market sold-off hard on Friday, and Stag’s shares were down a large 4.75%, thereby creating this very attractive high-income-generating options trade opportunity.

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Our Thesis:

Before even getting into the details of this high-income-generating options trade, it’s worth first mentioning our basic thesis. And that thesis is that Stag is an attractive dividend-paying REIT that is worth owning (as we wrote about in great detail here). That basic premise underlies the attractiveness of this income-generating options trade, as described below.

The Trade:

Sell Put Options on STAG Industrial (STAG), with a strike price of $25 (+10.8% out of the money), and expiration date of September 20, 2019, and for a premium of $0.15 (this comes out to approximately 7.2% of extra income on an annualized basis, ($0.15/$28.05 x 12 months). This trade not only generates attractive income for us now, but it gives us the possibility of owning shares of STAG at an even lower price if the shares fall even further than they already recently have, and they get put to us (and we’re happy to own STAG, especially if it falls to a purchase price of only $25 per share).

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Your Opportunity:

We believe this is an attractive trade to place today and potentially tomorrow as long as the price of STAG 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 7%, or greater.

Important Trade Considerations:

Two important considerations when selling put options are dividends and earnings announcements because they can both impact the price and thereby impact your trade. And in STAG’s case, they are largely non-issues. Specifically, STAG isn’t expected to announce again until the end of October (after this put option expires). And second, the next ex-dividend date isn’t until 9/27/19, after this options contract expires.

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Conclusion:

Not surprisingly, STAG shares sold off hard on Friday as the overall market sold-off. And in our view, this has created an attractive buying opportunity (if you are so inclined), and a very attractive opportunity to generate upfront income by selling put options on STAG. Specifically, if you are afraid there could be more market wide selling pressure ahead, and STAG shares could sell-off even further, then this options trade idea is a compelling way to generate attractive upfront income now (that you get to keep no matter what) and also giving you the chance to own STAG shares at an even lower price if they fall to $25 or lower and get put to you before the options contract expires next month. As we explained earlier in this article, we like STAG shares and believe they are an attractive long-term investment opportunity, and we wouldn’t be considering this options trade if we didn’t believe that. The premium income available on options trades generally increases when volatility/uncertainty increases (like it did on Friday for Stag), and this is a big part of the reason why we believe this income-generating STAG options trade is attractive right now.

Note: As a general rule, we like to keep our position sizes below 5% of our total portfolio (or 10% in very rare instances), so consider how big your position size will be if the shares get put to you. And as a specific view, we believe STAG’s shares are attractive right now (and we’d be happy to own them for the long-term). Things could get worse before they get better, but in the months and years ahead, we believe STAG’s share price is going higher (perhaps significantly higher), and those attractive monthly dividends will keep rolling in and keep growing too.

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