Last week, the Federal Reserve released the statement from its two-day meeting, Fed chair Janet Yellen addressed the media in a press conference … and, as I expected, nothing new hit the airwaves.
While that meeting was once D-day for hiking interest rates, those expectations have been dying for a while now. In the wake of continuously disappointing economic growth for the U.S. (GDP contracted 0.2% in the first quarter, the third time since the recession that the official GDP was negative), many analysts have realized what I’ve been saying for months: The Fed can’t raise rates right now for fear of capsizing our precarious economy. So expectations have understandably been pushed to later this year by almost everyone.
For the record, I expect 2016 to roll around before we see the first rate increase. That’s when we’ll likely see our rate-hike D-day — and even then it will be so gradual and uneventful that markets will shrug it off and traditional yields will remain miniscule.
In the meantime, despite analysts expecting rate hikes later this year, the “will they, won’t they” tension over the Fed’s decision has still managed to punish stocks that offer a nice yield. Investors have decided — unrealistically, I might add — to start preparing early for a return to normalized interest rates.
That overreaction brings me to today’s trade on Omega Healthcare Investors (NYSE: OHI).
Omega is a real estate investment trust (REIT) that has assets in the long-term health care industry, such as nursing homes and assisted-living facilities. These are areas that will continue to see demand grow — especially as baby boomers age into retirement in record numbers. In fact, in 2010, there were 40.3 million people aged 65 and above, comprising 13% of the overall population — which was 12 times more than the 4.1% number in 1900. And as of 2013, that segment of the population had grown to 14%.
So Omega’s assets will continue to see demand grow — which is a large part of why I like this REIT so much.
While the REIT’s fundamentals remain sound, Omega has been affected by the market’s temporary apathy for high-yielding stocks. Shares have been punished, shedding more than 13% over the last three months.
And that makes this a solid bargain play. Soon investors will wake up, realize that the coming rate hike will do nothing to alleviate the hunt for yield, and they will rush back into stocks like Omega.
That’s why I want to add exposure to this interest-rate sensitive sector today with Omega. The stock currently yields more than 6% a year, but we can do better than that by selling options.
Action to take: Set a Good ‘Til Canceled limit order to sell to open the OHI September 2015 $35 put option (OHI150918P00035000) at $1.30. At last glance, it was trading at $1.50 per contract. If your order is not filled by Friday’s close, cancel it and I will update you next week.
How the Trade Works
Since each contract covers 100 shares, you will collect $150 per contract sold.
In a cash-secured put transaction, you will need to deposit $3,500 with your broker. This will give you a yield of 4.2% ($150 divided by $3,500) in three months.
If you use margin, you will need to deposit about $700, a fifth of the full amount with your broker. This will give you an impressive yield of 21.4% ($150 divided by $700) in three months.
Capital Requirements
Make sure you are comfortable with the cash-secured account requirement. That is the amount that you will need in your account if we are put the stock.
By selling puts, we risk holding shares of the stock. However, I never sell puts on a company that I don’t want to own. So if shares of Omega are below our $35 strike price by September 18, that’s perfectly fine. We’ll have to purchase 100 shares for each contract we sold at $35, regardless of market price.
As I mentioned above, Omega is an ideal REIT that is positioned to benefit handsomely once investors realize the Fed’s inevitable rate hike will be much later, and much lower, than they expected.
Regards,
Chad Shoop
Investment Analyst