At TT Capital Management, we employ dynamic investing strategies and financial management to maximize risk-adjusted returns for our clients. To highlight some of these innovative approaches, clients have told me that they find trade examples helpful. Here is a trade we executed recently. EPR is a real estate investment trust that focuses on experiential properties such as theaters, wellness resorts, bowling alleys, theme parks, etc. It has an extraordinary track record and trades at a majorly discounted valuation. Below was a research report we did earlier in the year where we broke the company down in more detail. I want to preface this with not every account has this trade, but most have trades just like it. It all depends on objectives, risk tolerance, available cash, current portfolio composition, etc.
On 11/19/24, we bought 100 shares of EPR at $44.64. The stock pays an attractive monthly dividend of $.28 per share, which equates to a roughly 7.52% yield. Concurrently with buying the stock, we sold a covered call with a $45 strike price, that expires 241 days from now, in July of 2025. We collected a premium of $2.50 per share, or $250 total for selling the option. In this trade, there are only two things that can happen assuming we hold the calls till expiration, so think of it as the flip of a coin with heads and tails. The cash required on this trade is $4,214.
- If EPR expires above $45 in 241 days you will collect the full target profit of $250 or 5.93% on the cash required on the trade, from the selling of the call, plus another $224 from the stock dividend (8 monthly payments), plus $36 in appreciation on the stock to $45, for a total of $510 or 12.1% on maximum risk. This equates to 18.33% annualized and you will have sold your stock freeing up the cash.
- If EPR expires below $45 you will own 100 shares at a breakeven of $42.14 and will have all upside or downside from there. Therefore, the stock could go down 5.6% by expiration before you lose a penny. If you also add the $2.24 per share dividend you collected, that lowers your breakeven to $39.90, or 10.6% and you could sell another set of covered calls from there.
These are the types of investments that offer high double-digit annualized returns, with significantly less risk than the overall market. Between the dividends and the option premiums, we can keep reducing your cost basis on your shares. There will be a time like 2022, or 2008, when stock markets plummet. By protecting our hard-earned capital in those circumstances, we should have the opportunity to play offense when the odds are stacked in our favor. This is a major opportunity, which requires patience and discipline. I hope that you found this helpful.