Real estate investment trusts have been holding up reasonably well during this market correction, and one of the most popular REIT stocks is Realty Income (O).
Realty Income specializes in high-quality, income-generating commercial properties across the U.S. and Europe. The company primarily leases retail and industrial properties to tenants in essential industries. These usually come under long-term, triple-net leases, ensuring stable cash flow.
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Known as “The Monthly Dividend Company,” Realty Income has paid uninterrupted dividends since its founding in 1969, with a strong history of dividend growth.
Income investors that want to increase the yield on this low beta stock could look at a covered call trade. A covered call strategy is one way to slightly reduce the risk on a long stock position while also generating some premium. However, the catch is that the upside is limited above the covered call strike.
REIT Stocks: How A Covered Call Works Here
Let’s look at how a covered call trade on Realty Income might take shape. Buying 100 shares of Realty Income would cost around $5,700. A May 16, 57.50-strike call option recently traded around $1.30, generating $130 in premium per contract. Selling the call option generates an income of 2.33% in a month and a half, equaling around 19.36% annualized.
If Realty Income stock closes above 57.50 on the expiration date, the shares will be called away at 57.50. The move yields a total profit of $180 — the gain on the shares plus the $130 option premium received. That also equates to a 3.23% return, which is 26.81% on an annualized basis.
If Realty Income stays below 57.50, the investor can continue selling call options until the shares get called away. Of course, the risk with the trade is that Realty Income stock might drop. That could wipe out any gains made from selling the call.
Covered calls can be an effective strategy for generating income, managing downside risk, and reducing the effective purchase price of a stock. One downside for Realty Income is the poor ratings from Investor’s Business Daily. That means investors would need to weigh that up before making any investment decision.
Where Realty Income Ranks Among Other Stocks
Realty Income has been showing an improving Relative Strength Rating in recent months.
According to the IBD Stock Checkup, Realty Income stock is ranked number 61 in its group. Further, it has a Composite Rating of 63, an Earnings Per Share Rating of 33 and a Relative Strength Rating of 75.
Realty Income is due to report earnings in early May. So, this trade would have earnings risk if held through that time.
Please remember that options in REIT stocks and other investments 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.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, and is conservative in his style. He believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
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