With markets being a little shaky these days, investors might be more interested in generating income rather than capital gains.
Iron Mountain (IRM) has been a strong performer in the past six months, rising 16.89% compared with the S&P 500 (SPY) which is up only 5.72%.
IRM also pays a hefty dividend with the current dividend yield sitting at 4.16%.
Using options, we can generate an additional income from high yielding stocks via a covered call strategy.
IRM Covered Call Example
Let’s look at two different covered call examples on IRM stock. The first will use the November expiration and the second will use a six-month expiration.
Let’s evaluate the first IRM covered call example.
Buying 100 shares of IRM would cost around $6,160. The November 17, $62.50 strike call option was trading yesterday around $1.60, generating $160 in premium per contract for covered call sellers.
Selling the call option generates an income of 2.66% in 31 days, equalling around 30.38% annualized. That assumes the stock stays exactly where it is. What if the stock rises above the strike price of $62.50?
If IRM closes above $62.50 on the expiration date, the shares will be called away at $62.50, leaving the trader with a total profit of $243 (gain on the shares plus the $160 option premium received). That equates to a 4.05% return, which is 46.14% on an annualized basis.
Instead of the November 17 call, let’s look at selling the April $62.50 call instead.
Selling the April $62.50 call option for $4.25 generates an income of 7.40% in 185 days, equalling around 14.52% annualized.
If IRM closes above $62.50 on the expiration date, the shares will be called away at $62.50, leaving the trader with a total profit of $508 (gain on the shares plus the $425 option premium received).
That equates to an 8.85% return, which is 17.36% on an annualized basis.
Of course, the risk with the trade is that the IRM might drop, which could wipe out any gains made from selling the call.
Also, any gains above $62.50 are foregone.
Barchart Technical Opinion
The Barchart Technical Opinion rating is a 72% Buy with a Average short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
The market is approaching overbought territory. Be watchful of a trend reversal.
Implied volatility is at 26.60% compared to a 12-month low of 18.29% and a 12-month high of 44.39%.
The next earnings release is set for November 2nd.
The current analysts ratings are shown below:
Company Description
Iron Mountain Inc. is the global leader for storage and information management solutions.
It stores records and data backup media, and provide information management services that help global organizations protect their information, lower storage rental costs, comply with regulations, enable corporate disaster recovery, and better use their information for business advantages, regardless of its format, location or lifecycle stage.
It offers comprehensive records and information management & data management services, with the expertise and experience to address complex storage and information management challenges such as rising storage rental costs, and increased litigation, regulatory compliance and disaster recovery requirements.
It has 3 segments: Global Records and Information Management (RIM) Business consisting of records management, data management, global digital solutions, secure shredding, secure IT asset disposition and consumer storage, Global Data Center Business and Corporate and Other Business.
Covered calls can be a great way to generate some extra income from your core portfolio holdings.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
