CareTrust REIT (CTRE) is a real estate investment trust primarily engaged in the ownership, acquisition and leasing of health care properties — and it offers a compelling 4% annual dividend yield. CareTrust also has been one of the best-performing REITs this year, with the stock up 25%.
As a result, income investors may want to further enhance the attractive dividend yield through the use of covered calls.
A covered call strategy is one way to slightly reduce the risk on a long stock position while also generating some option premiums. The catch: Upside remains limited above the covered-call strike.
Let’s look at how a covered-call trade on CareTrust might take shape.
How To Handle This REIT
Buying 100 shares of this REIT would cost around $3,430. A Jan. 16, 35-strike call option is trading around $1.25, generating $125 in premium per 100-share contract. Selling the call option generates an income of 3.8% in under four months, equaling around 11.9% annualized.
If CareTrust stock closes above 35 on the expiration date, the shares are called away at 35, leaving the trader with a total profit of $195. That amounts to the gain on the shares plus the $125 option premium received. It equates to a 5.9% return, or 18.6% on an annualized basis.
Of course, the risk with the trade is that CareTrust stock might drop, which could wipe out any gains made from selling the call.
The REIT is due to report earnings in late November, so this trade would have earnings risk.
CareTrust is currently showing implied volatility of 22.15% compared with a 12-month low of 13.25% and a twelve-month high of 72.44%.
CareTrust Stock Ratings
Investor’s Business Daily gives CareTrust a Composite Rating of 91 out of a best-possible 99, an Earnings Per Share Rating of 92 and a Relative Strength Rating of 71. According to IBD Stock Checkup, the REIT ranks first in its group.
Covered calls can be an effective strategy for generating income, managing downside risk, and reducing the effective purchase price of a stock.
A cash-secured put trade on CoreWeave (CRWV) is working well so far and can potentially be closed early for a nice gain. Further, a bull call spread trade on Tesla (TSLA) has also performed very well for those that were able to participate.
Please remember that options 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 also 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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