Omega Healthcare Inc ( IHO ) is definitely a fun ticker. We have had a nice friendly (and we use the term very loosely) SWAN ( S leep W Ell AT t NOT ight) stock or not. The current debate has also brought forward some excellent research from both sides. Crowd sourcing at its best. our last thoughts on this Were Industry standards may have changed. We have not kept track of this long ago. They may be adequate at a time when they seem to have a seemingly nice cushion. For our part, we share the view that we have not been able to do so. At present we do not have a pure value play but the market is multiple, lot of bad news is perhaps discounted. We ruminated on this for some time and decided to take a LEAP of faith. Literally. IHO downgraded to a DUCK If this stock is a SWAN it is being mauled by a bear. We have new bird acronym for this one though. DUCK. D on’t U nderestimate C urrent K haos. It may appear that we have some liberties with the “K” but that is a perfectly valid spelling of the Greek Goddess . We need to understand that the quarterly dividend should not be confused with stability in this sector. As we have pointed out, there is a lot of room for change in the future.
When the going gets tough, the tough use options However, the recent resilience in the face of a stronger selloff in the rest of the REIT sector made us think that the worst was priced in. Perhaps. Not willing to commit a serious amount of capital but willing to make a decision. We sold the $ 27 put for Jan 2020. Why the option helps us deal with the situation far better Our stance on the market has been broken down, the dividend coverage will look precarious. This may be a dividend for the future. One of the other hand, we believe that this can be a sub-9x adjusted assets from operations (AFFO). There are two ways to control your risk on a stock. The first is by Trapping Value Rules of acquisition number 1. The second is by modulating the risk reward it is exactly where you want it. Options are excellent choices for that. Here we demonstrate why the least used strategy is “cash secured put” works far better than the traditional method of “covered calls”. Cash Secured Put vs. Covered Calls Firstly for a given strike, there is no difference between the expected return of a covered call or cash secured put. Never. The complex proof behind this can be seen here , but we have provided a simpler explanation below. If a stock is at $ 10. You buy the stock. You sell the call for $ 0.50. You buy the put for $ 0.70. You collect $ 0.20 of dividends until expiration. You spent $ 1,000 (ignoring commissions). $ 1.000 + $ 50- $ 70 + $ 20 = $ 1000 You can not miss a cent on this trade as it goes below $ 10 your put protects you. You can not make a cent on this trade as it goes above $ 10, your sold call kicks in. If you could in this example even collect $ 25 in dividends, you would have a $ 5 free way of making. Banks who would trade commission free would leverage that to infinity.
Now with a real live example of what we did. The first thing to watch is the remarkable difference in the price of $ 27 strike. Sure, some of it is due to be put slightly in the money. But the vast majority is because of the expected dividends. We can also see this when computing expected returns. Source: Author’s calculations, assume 65 cent dividends every quarter. For vast majority of situations these should be very similar. There are a few other things you can do about it, and you can make a little bit more money. If you ever see a huge difference in these terms, the market is usually pricing in a dividend cut. Note that in the absence of a higher rate of return. Some of it is due to the value of money, and it is likely that the market will not be maintained. Currently there is a small difference but that did not make the idea of selling any less appealing. As a REIT IHO can not avoid its dividends. However, it is definitely over the 90% of its net income, it should be more difficult, the dividend could be cut. We currently think of the chance of a “dividend” and “catch” those dividends. We are giving it a chance to make it up to 25.58% (12.79% annually) is not trivial. It is also designed to deliver a “flat” stock outlook and it exceeds your estimate of the potential return in this stock.
Conclusion Cash-protected puts a few advantages, a single transaction to initiate, a set of commissions and Covered calls can be called for dividends and total expected return can vary markedly. Here, the biggest risk is the current issues with OHI resolve. The chance of a dividend is not trivial We would only want to be romance this stock a bit more if we knew for sure we would get paid for them over the next two years. By this strategy, we can be certain. At a greater level of certainty, it will be strongly outperformed covered calls during recessions. During the global financial crisis for example, many dividends that were thought to be rock solid were cut just a few months later. Cash-protected puts would have solidly outperformed the dividend capture. They can underperform when a company Unexpectedly raises dividends, but those are few and far between cases. Disclaimer: Please note that this is not financial advice. It may seem like it, sound like it, but it is not. Investors are expected to do their own due diligence and consult a professional who knows their objectives and constraints. Seeking Alpha has changed its policies. Previously “following” someone required a ritualistic commitment and an offering of 4 oxen or 3 breeding horses. Now, all it takes is one click! If you enjoyed this article, please scroll up and click on the “Follow” button next to my name to not miss my future articles. If you did not like this article, please read it again, change your mind Then click on the ” Follow “button next to my name to not miss my future articles.
Disclosure: I am / we are long IHO.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with this article.
Additional disclosure: We are short 1 $ 27 put for Jan 2020.