Commit To Buy Lithia Motors At $210, Earn 6.5% Annualized Using Options

As potential investors weigh the decision of purchasing Lithia Motors Inc (Symbol: LAD) stock at its current market price of $282.08 per share, there is an intriguing alternative strategy to consider – selling puts. Specifically, the November put at the $210 strike presents an interesting opportunity. At the time of writing, this put option commands a bid of $10.00. Leveraging this bid as the premium offers a 4.8% return against the $210 commitment. Furthermore, it translates to a robust 6.5% annualized rate of return, which, in the language of Stock Options Channel, we fondly refer to as the YieldBoost.

Though selling a put does not bestow an investor with the potential upside of owning shares, it presents an interesting pathway to share ownership under specific scenarios. For the put seller, ownership of shares only becomes a reality if the contract is exercised. Additionally, for the counterparty to the contract, exercising at the $210 strike is beneficial only if it yields a better outcome than selling at the current market price.

For the put seller, the upside lies in collecting the premium, translating to a 6.5% annualized rate of return, unless Lithia Motors Inc witnesses a significant drop of 26.5% and the contract is exercised. In this situation, the cost basis would be $200.00 per share (subtracting the $10.00 from $210) prior to broker commissions.

It’s noteworthy that the annualized 6.5% figure surpasses the 0.7% annualized dividend paid by Lithia Motors Inc by a substantial margin of 5.8%, based on the current share price of $282.08. Moreover, purchasing the stock at the market price to capture the dividend exposes investors to greater downside risk, as the stock would need to decline by 26.51% to reach the $210 strike price.

When contemplating dividends, it’s imperative to acknowledge that dividend amounts are not always predictable and often fluctuate in tandem with a company’s profitability. A glance at the dividend history chart for LAD can serve as a valuable guide in assessing the likelihood of the current dividend’s continuation and, subsequently, in estimating a reasonable expectation for a 0.7% annualized dividend yield.

Below is a depiction of the trailing twelve month trading history for Lithia Motors Inc, accentuating in green the position of the $210 strike concerning that historical context.

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The historical volatility of the stock and the chart above can serve as helpful tools, combined with fundamental analysis, in evaluating the viability of selling the November put at the $210 strike for a 6.5% annualized rate of return. The trailing twelve-month volatility for Lithia Motors Inc, based on the last 251 trading day closing values and the current price of $282.08, stands at 39%. For alternative put options contract ideas at different available expirations, a visit to the LAD Stock Options page of StockOptionsChannel.com is recommended.

During mid-afternoon trading on Wednesday, the put volume among S&P 500 components amounted to 1.90M contracts, while call volume reached 2.47M. As a result, the put:call ratio for the day rested at 0.77, reflecting an unusually high figure in comparison to the long-term median put:call ratio of .65. Evidently, there is a pronounced prevalence of put buyers in today’s options trading activities in contrast to call buyers.