Strategy To YieldBoost Harley-Davidson To 6% Using Options

Shareholders of Harley-Davidson Inc (NYSE: HOG) looking to boost their income beyond the stock's 1.8% annualized dividend yield can sell the January 2016 covered call at the $70 strike and collect the premium based on the $3.50 bid, which annualizes to an additional 4.3% rate of return against the current stock price (at Stock Options Channel we call this the YieldBoost), for a total of 6% annualized rate in the scenario where the stock is not called away. Any upside above $70 would be lost if the stock rises there and is called away, but HOG shares would have to climb 12.3% from current levels for that to happen, meaning that in the scenario where the stock is called, the shareholder has earned a 17.9% return from this trading level, in addition to any dividends collected before the stock was called.

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In general, dividend amounts are not always predictable and tend to follow the ups and downs of profitability at each company. In the case of Harley-Davidson Inc, looking at the dividend history chart for HOG below can help in judging whether the most recent dividend is likely to continue, and in turn whether it is a reasonable expectation to expect a 1.8% annualized dividend yield.

Below is a chart showing HOG's trailing twelve month trading history, with the $70 strike highlighted in red:

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 2016 covered call at the $70 strike gives good reward for the risk of having given away the upside beyond $70. (Do most options expire worthless? This and six other common options myths debunked). We calculate the trailing twelve month volatility for Harley-Davidson Inc (considering the last 251 trading day closing values as well as today's price of $62.27) to be 20%. For other call options contract ideas at the various different available expirations, visit the HOG Stock Options page of StockOptionsChannel.com.