Agree To Purchase Huntington Ingalls Industries At $200, Earn 7.9% Annualized Using Options

An analysis of selling a put option for Huntington Ingalls Industries (HII) at a $200 strike price reveals a potential 7.9% annualized return, exceeding HII's 2.3% dividend yield. However, this strategy only yields shares if HII declines 13.4%, while buying the stock for the dividend exposes investors to similar downside risk; HII's 47% trailing twelve month volatility should be considered when evaluating the risk/reward.

Analysis

The article details a specific options strategy for Huntington Ingalls Industries (HII), involving the sale of a December put option at a $200 strike price. This strategy offers a notable 7.9% annualized return from the collected premium of $8.00 per share, substantially exceeding HII's current 2.3% annualized dividend yield by 5.6 percentage points, based on a share price of $230.79. However, the put seller only acquires HII shares if the stock price declines by 13.4% from its current level to reach the $200 strike, resulting in an effective cost basis of $192.00 per share before commissions if the option is exercised. This downside threshold is similar to the decline required for a direct stock purchaser at $230.79 to reach the $200 price point. The article highlights HII's significant trailing twelve-month volatility, calculated at 47%, as a critical factor in assessing the risk-reward profile of this options trade. Furthermore, it underscores the general unpredictability of dividend payments and advises examining HII's dividend history to gauge the sustainability of its current yield, suggesting that a combination of historical volatility analysis and fundamental company assessment is necessary to determine the attractiveness of the proposed put sale.

Key Decisions for Investors

• Investors could consider selling the HII December put option with a $200 strike to capture a 7.9% annualized yield, significantly higher than the stock's 2.3% dividend yield, but must be prepared to acquire shares at an effective cost of $192.00 if HII's price falls approximately 13.4%.
• A thorough risk assessment is warranted, factoring in HII's high trailing twelve-month volatility of 47% and conducting fundamental due diligence to ascertain if the premium offers adequate compensation for the potential obligation to purchase the stock upon a significant price decline.
• For those evaluating income strategies, this put sale offers enhanced yield over current dividends but sacrifices direct equity upside unless assigned; concurrently, an analysis of HII's dividend payment history is crucial to assess the reliability of its dividend yield for a comprehensive comparison.