Commit to purchase Waste Management at $52.50, earn 4.2% using options

Investors eyeing a purchase of Waste Management, Inc. (WM) stock, but tentative about paying the going market price of $61.36/share, might benefit from considering selling puts among the alternative strategies at their disposal. One interesting put contract in particular, is the January 2018 put at the $52.50 strike, which has a bid at the time of this writing of $2.20. Collecting that bid as the premium represents a 4.2% return against the $52.50 commitment, or a 2.6% annualized rate of return.

Selling a put does not give an investor access to WM’s upside potential the way owning shares would, because the put seller only ends up owning shares in the scenario where the contract is exercised. And the person on the other side of the contract would only benefit from exercising at the $52.50 strike if doing so produced a better outcome than selling at the going market price. So unless Waste Management, Inc. sees its shares decline 14.5% and the contract is exercised (resulting in a cost basis of $50.30 per share before broker commissions, subtracting the $2.20 from $52.50), the only upside to the put seller is from collecting that premium for the 2.6% annualized rate of return.

Chart showing the trailing twelve month trading history for Waste Management, Inc. , and highlighting in green where the $52.50 strike is located relative to that history.
Chart showing the trailing twelve month trading history for Waste Management, Inc. , and highlighting in green where the $52.50 strike is located relative to that history.

The chart above, and the stock’s historical volatility, can be a helpful guide in combination with fundamental analysis to judge whether selling the January 2018 put at the $52.50 strike for the 2.6% annualized rate of return represents good reward for the risks. We calculate the trailing twelve month volatility for Waste Management, Inc. (considering the last 253 trading day closing values as well as today’s price of $61.36) to be 15%.

In mid-afternoon trading on Friday, the put volume among S&P 500 components was 746,439 contracts, with call volume at 746,439, for a put:call ratio of 0.72 so far for the day, which is above normal compared to the long-term median put:call ratio of .65. In other words, if we look at the number of call buyers and then use the long-term median to project the number of put buyers we’d expect to see, we’re actually seeing more put buyers than expected out there in options trading so far today.

-Source Stock Options Channel-

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