Investors Consider Selling Puts on STERIS plc for Income
Investors contemplating a purchase of STERIS plc (Symbol: STE) Stock may find it advantageous to consider selling puts as an alternative strategy, rather than paying the current market price of $218.09 per share. A noteworthy option is the September put at the $200 strike, which is bidding at $7.40 at present. Accepting this bid allows investors to earn a 3.7% return against the $200 commitment, equating to an annualized return of 7.4%. At Stock Options Channel, we refer to this as the YieldBoost.
However, selling a put means investors do not gain access to STE’s potential upside like they would through direct share ownership. The put seller will only acquire the shares if the contract is exercised. The individual on the other end of the contract would only benefit from exercising it at the $200 strike if it yields a better outcome than the current market price. In order to warrant exercising the option, STERIS plc shares must decrease by 8.1%, leading to a cost basis of $192.60 per share (this accounts for the $7.40 premium subtracted from $200), prior to any broker commissions. Thus, the seller’s only advantage arises from collecting the premium for the annualized return of 7.4%.
Notably, this 7.4% annualized return surpasses the 1.1% annualized dividend offered by STERIS plc by 6.3%, based on the prevailing share price of $218.09. Conversely, if an investor bought Stock solely to receive the dividend, they face greater risk—specifically, the Stock would need to drop 8.13% to hit the $200 strike price.
Discussions around dividends remain pertinent since dividend amounts can vary and generally reflect the company’s profitability. In the case of STERIS plc, examining the dividend history chart for STE below may provide insights into the likelihood of maintaining the current dividend level and, consequently, the expectation of achieving that 1.1% annual yield.
The chart below illustrates STERIS plc’s trailing twelve-month trading history, highlighting the position of the $200 strike relative to that track record:
This chart, in conjunction with the Stock‘s historical volatility, may aid investors in determining whether selling the September put at the $200 strike for the 7.4% annualized rate of return compensates adequately for the risks involved. Based on assessments of STERIS plc’s last 250 trading days and its current share price of $218.09, we calculate a trailing twelve-month volatility of 21%. For alternative put option strategies with varying expirations, visit the STE Stock Options page on StockOptionsChannel.com.
During mid-afternoon trading on Friday, among S&P 500 components, put volume reached 1.33 million contracts, equaling call volume at 1.33 million, resulting in a put:call ratio of 0.70. This figure is greater than the long-term median put:call ratio of 0.65. Consequently, this indicates a higher than expected presence of put buyers in the options trading landscape today.
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The views and opinions expressed herein are solely those of the author and do not necessarily represent those of Nasdaq, Inc.
