YieldBoost RAI To 11.5% Using Options

Shareholders of Reynolds American Inc (RAI) looking to boost their income beyond the stock's 3.8% annualized dividend yield can sell the August covered call at the $72.50 strike and collect the premium based on the $2.35 bid, which annualizes to an additional 7.7% rate of return against the current stock price (at Stock Options Channel we call this the YieldBoost), for a total of 11.5% annualized rate in the scenario where the stock is not called away. Any upside above $72.50 would be lost if the stock rises there and is called away, but RAI shares would have to climb 2.7% from current levels for that to happen, meaning that in the scenario where the stock is called, the shareholder has earned a 6.1% return from this trading level, in addition to any dividends collected before the stock was called.