Telstra TLS.ASX
Last $2.95
TLS has lost 4% post announcement of its deal with NBN co and government. Hence providing some downside buffer for those who are interested to buy the share. At the same time, with the lingering hesitation in the market to increase risk appetite, a stable good paying stock like Telstra may just be the right remedy for investors who are as hesitant as the market.
TLS will be reporting on 11 August, most likely with a flattish report card. With that in mind, the stock may just hover around its current level of $2.95 with a possible 5c plus or minus range till about 25 August (the expiry date of August options).
In the current market environment where yield is pursued, especially with cash rate remaining stable at 4.75% in Australia, cash in the pocket is much more desired than paper gains (or losses) sitting in portfolios.
Our goal with TLS is to make the share that is in many Australians’ portfolio, work harder; even for those who don’t own the stock, the opportunity to buy the stock and implement the strategy below for more cash in the pocket.
Existing shareholders or those who will be buying it will be entitled to the 14c dividend which is expected to be ex’d around 23 August, generating a yield of 4.7% on $2.95 in less than 50 days.
But, with the use of options, we can do better.
Options Strategy on Telstra
Sell strangles.
With the view that TLS will not move much away from its current price of $2.95, we will use options to create a range for the share, but at the same time giving it a wider room to run within it, catering for the impending sluggishness in the stock after it sheds its dividend.
Strategy in detail:
Leg 1 # sell call options
Sell Aug $3.10 call for 2c credit per contract (100 shares)
and
Leg # 2 sell put options
Sell Aug $2.80 put for 5.5c credit per contract (100 shares)
The total income from these two trades are a combination of 7.5c, raking in an extra 2.5% yield on top of the 4.7%. A total of 7.2% in less than 50 days.
Possible scenarios
TLS stays within $2.80 to $3.10:
Shareholders of TLS will enjoy the 7.2% yield if TLS trades within the $2.80 to $3.10 range by 25 August.
TLS below $2.80:
What if Telstra falls more than its dividend of 14c from $2.95 to below $2.80?
Then, the investor will be assigned to buy more TLS shares at the breakeven price of $2.725 ($2.80 put strike – 7.5c options income earned).
The new shares purchased via options assignment will most likely not be entitled to the 14c dividend, but existing holdings (either already owned or purchased for this strategy) would.
TLS above $3.10:
The other possible scenario is TLS running up strongly before its expected ex dividend date of 23 August and breaches the $3.10 level.
Then, the investor may be assigned to sell their current holdings at $3.175. Assuming purchased at the current price of $2.95, that is a return of 22.5c or 7.6% in less than 50 days.
Either way, looks like your pocket will be at least 21.5c heavier (for every 100 shares owned).
