As prospective investors mull over the idea of acquiring NAPCO Security Technologies, Inc. (Symbol: NSSC) stock at the current market price of $44.39/share, they are presented with an alternative strategy worthy of consideration – selling puts. A particularly intriguing put contract to reflect on is the December put at the $40 strike, offering a $4.00 bid at the time of writing. Approaching this as a premium, it represents a 10% return against the $40 commitment or an 11.8% annualized rate of return, which we at Stock Options Channel fondly refer to as the YieldBoost.
While selling a put doesn’t grant an investor the same access to NSSC’s potential upside as owning shares would, the put seller only becomes a shareholder if the contract is exercised. Moreover, the counterparty on the other end would only benefit from exercising at the $40 strike if it resulted in a more favorable outcome than selling at the current market price. Therefore, unless NAPCO Security Technologies, Inc. witnesses a 10.5% decline and the contract is exercised, yielding a cost basis of $36.00 per share before broker commissions by subtracting the $4.00 from $40, the only upside for the put seller lies in collecting the premium for the 11.8% annualized rate of return.
Moreover, this annualized 11.8% figure surpasses the 0.9% annualized dividend provided by NAPCO Security Technologies, Inc. at the current share price of $44.39, by 10.9%. Surprisingly, if an investor were to buy the stock at the prevailing market price to collect the dividend, there would be a greater downside, requiring the stock to decrease by 10.47% to reach the $40 strike price.
It’s worth noting that when discussing dividends, it’s crucial to acknowledge that dividend amounts aren’t always predictable and tend to fluctuate with the profitability of each company. Examining the dividend history chart for NSSC below aids in assessing whether the most recent dividend is likely to continue, and consequently, whether it’s reasonable to anticipate a 0.9% annualized dividend yield for NAPCO Security Technologies, Inc.
Below is a chart illustrating the trailing twelve month trading history for NAPCO Security Technologies, Inc., with the $40 strike highlighted in green in relation to that history:
The above chart and the stock’s historical volatility, combined with fundamental analysis, can serve as a valuable guide in evaluating whether selling the December put at the $40 strike for the 11.8% annualized rate of return presents a favorable trade-off between reward and risk. We calculate the trailing twelve month volatility for NAPCO Security Technologies, Inc. (considering the last 251 trading day closing values as well as today’s price of $44.39) to be 79%. For additional put options contract ideas across different available expirations, visit the NSSC Stock Options page on StockOptionsChannel.com.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
