The Stock Option Writer
© Warren Kaplan 2011-2012
June 20, 2012
The cruise industry continues to grow every year and with an increase in retirees, I see a great long-term future for them. The retirees are taking longer cruises and in many cases, they are taking children and grandchildren with them. As a result, the cruise companies went on a huge spending spree and built bigger and better ships that operated more economically than in the past. This is an industry that I consider S&S (slow and steady). The following company description is from Yahoo.
“Royal Caribbean Cruises Ltd. operates in the cruise vacation industry worldwide. It owns five cruise brands, which comprise Royal Caribbean International, Celebrity Cruises, Pullmantur, Azamara Club Cruises, and CDF Croisières de France. The Royal Caribbean International brand provides various itineraries and cruise lengths with options for on board dining, entertainment, and other onboard activities primarily for the contemporary segment. It offers surf simulators, water parks, ice skating rinks, rock climbing walls, and shore excursions at each port of call, as well as boulevards with shopping, dining, and entertainment venues. The Celebrity Cruises brand operates on board upscale ships that offer luxurious accommodations, fine dining, personalized services, spa facilities, venue featuring live grass, and glass blowing studio for the premium segment, as well as resells computers and other media devices. The Pullmantur brand provides an array of onboard activities and services to guests, including exercise facilities, swimming pools, beauty salons, gaming facilities, shopping, dining, complimentary beverages, and entertainment venues serving the contemporary segment of the Spanish, Portuguese, and Latin American cruise markets. The Azamara Club Cruises brand offers various onboard services, amenities, gaming facilities, fine dining, spa and wellness, butler service for suites, and interactive entertainment venues for the up-market segment of the North American, United Kingdom, German, and Australian markets. The CDF Croisieres de France brand offers seasonal itineraries to the Mediterranean; and various on board services, amenities, entertainment venues, exercise and spa facilities, fine dining, and gaming facilities for the contemporary segment of the French cruise market. As of December 31, 2011, the company operated 39 ships with a total capacity of approximately 92,650 berths. Royal Caribbean Cruises Ltd. was founded in 1968 and is headquartered in Miami, Florida.”
All that being said, the current dividend is $.40 a year, $.10 quarterly. This is really meager compared to the earnings estimate of $2.00 this year and $2.50 next year. One of the biggest expense is fuel so the lower oil and fuel prices go, the more profit the cruise line makes. Today, the stock price is $26.00 so the yearly dividend pays you 1.54%.
Here are some option writing ideas. You can receive $1.65 for writing the September 2012 put at $25.00. Believe me, this stock can dip quickly to the $25 area. However, the premium equates to an annual yield of 28.27% because you actually only need $23.35 to make the trade, which is a lot better than 1.54% current dividend and the stock has to dip down 3.84% from its current price. If you do get put, your cost would be $23.35, the $.40 would have an annual yield of 1.71% and of course, you can sell a covered call and take in more premiums. The next ex-dividend date should be around August 18 but that should only affect the stock price by $.10 unless than raise the dividend and if they did, I would expect it to be raised by no more than $.05. Another idea is to just buy the stock at $26.00 and sell the Sept. 2012 $26 call and take in $2.15. That reduces your cost to $23.85 and if you sell the stock at $26 by September, you will have made $2.15 plus the dividend of at least $.10 for a total annualized yield of 37.74%. Remember, that if the stock price is $25.99 in September, you will not be called and you can write a fresh call option. If you are optimistic about the company or at least the price trend of the stock, you can buy the stock at $26 and sell the Sept. 2012 call at $27 and receive $1.65. Your true cost would be $24.35 and a sale at $27.00 would bring you a profit of $2.65 for an annualized yield of 43.53% plus you would get the dividend.
Longer-term option writing opportunities are available. December 2012 $25 puts bring $2.68 (your stock cost would be $22.32 and the annualized yield to you if you are not assigned the shares at $25 would be 21.44%. The December 26 2012 puts will bring you $3.20 so you only have to post $22.80 and your annualized return would be 28.07%.
There are a variety of option strike prices on RCL and you have to decide how safe or how wild you want to be. Of course you should never get involved with a stock if you don’t like the company.
There is one extra benefit to owning the shares. Currently, RCL offers shareholders an on board the ship credit depending on the length of the cruise. So a typical 7 day cruise for a shareholder with at least 100 shares, will get a $100 OBC. Credits on 3-6 night cruises get a $50 credit and 10 days or longer get a $200 credit. Your travel agent needs to ask for the credit and you need to provide your latest brokerage statement that shows you own the shares. The credit is for the stateroom only and not per person.
Yes, I am long the shares and I have been selling call options for years with superior results and fat or lean premiums. The lean premiums are garnered when I sell far out of the money options that are relatively short term, as I don’t care if I sell the stock at a very high price as one of the reasons I own the stock is for the OBCs.
Warren Kaplan has been writing options for 50 years. He has been a stockbroker, investment banker and brokerage owner. He currently owns and operates Kaplan Asset Management, a provider of financial assistance for small to middle market businesses. He has more than a half-century of experience in dealing with financial markets, giving guidance and consulting with management, and assisting in the development of business strategies and solutions. The Company has assisted and consulted many successful companies, such as Natures Bounty (NBTY) and Action Products International (APII), helping them to go public and trade on the NASDAQ stock exchange. His philosophy is to “do something with the profits.” “If you make $100 in the stock market, take 50 percent and invest it back into the market. Then, take the other 50 percent and buy yourself something.”
Reader’s comments are welcome. Please do not consider these opinions as advice and we take no responsibility for any trades made. You should review these option writing ideas with your financial advisor so that you are properly guided. Writing options is not for everyone. If you want information about a certain stock, please email firstname.lastname@example.org.