Top REIT Stocks Today: How A Bull Put Spread In This Market Leader Could Make A 9% Annualized Return
Among top REIT stocks today, check out Arbor Realty Trust (ABR). This Uniondale, N.Y., firm ranks number one in the mortgage REIT industry group, according to IBD Stock Checkup. Arbor also pays a healthy annualized dividend yield of 7.3%.
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In contrast, the S&P 500 shows a yield of 1.33%.
The company also stands out among top REIT stocks today with an IBD Composite Rating of 88, an EPS Rating of 80, and a Relative Strength Rating of 85.
One way to take ownership of a stock for less than the current price is via an option strategy called a cash-secured put. It is a slightly less bullish trade than buying the stock. Consider it a neutral to slightly bullish trade.
A cash-secured put involves writing an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock. The goal: either have the put expire worthless and keep the premium or be assigned and acquire the stock below the current price.
Selling put options is an easy place for investors to start. They are like a covered call and are pretty easy to understand once you know the basics.
Traders selling puts should understand that they may be assigned 100 shares per option contract at the strike price.
Top REIT Stocks Today: Setting Up The Cash-Secured Put
With Arbor Realty Trust stock trading near 19.13 recently, investors could sell an April 2022 monthly put option with a strike price of 17.50 for around 75 cents per share.
An investor selling this put would receive $75 into their account for a block of 100 shares, which would be theirs to keep. If ABR falls below 17.50 by April next year, they would be required to buy 100 shares at 17.50 each. The effective net cost of the position would be 16.75 per share, thanks to the option premium received. That is 12.4% below Tuesday’s closing price.
So, if the stock stays above 17.50 at expiry, the put expires worthless, leaving the trader with a 4.48% return on capital at risk. That works out to be 8.93% annualized.
The main risk with the trade is similar to outright stock ownership. If the stock falls quickly, the trade will suffer a loss. However, the premium received will help to offset the loss.
Risk Management Tip
The maximum loss on the trade would occur if ABR fell to $0, which would see the trade lose $1,675. But most traders would cut losses long before then.
Cash-secured puts are a great way to generate a return on strong stocks — even in top REIT stocks today — without potentially having to take ownership.
If the put does get assigned, the investor takes ownership with a reduced cost base and can potentially begin selling covered calls to generate additional income from the position.
Conservative investors may prefer to wait for a pullback in Arbor Realty stock before selling puts.
Please remember that options are risky, and investors can lose 100% of their investment.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ.
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