Updated Enhanced Income Strategy For Blackrock

Jun.25.12 | About: BlackRock, Inc. (BLK)

By Mark Bern, CPA CFA

We have sold three puts on Blackrock (NYSE:BLK) and we finally were put the stock on June 15, 2012 at the strike price of $180. After subtracting the put premium from the strike price we find we have a cost basis (for tax purposes) of $175.40 per share ($180 - $4.60). But we had earned a decent return on the cash held in our account to secure the puts sold previously in October 2011 and January 2012. The total premiums we received from those first two puts sold was $1,072 (net of commissions) for a return of 6.7 percent in just six months, or an APR of about 13.4 percent.

On the down side, we now have an unrealized loss on the stock we hold of $340 since the current price (as of the close on Friday, June 22, 2012) is $172.00. But it does help knowing that the $1,072 we have earned thus far more than offsets that loss.

Looking forward, I plan on holding onto BLK and selling covered calls against our new position to enhance the yield to more than the current dividend yield of 3.5 percent. As a matter of fact, the January 2013 $190 strike call option seems to fit the ticket for me. It sports a premium of $6.30 per share for a seven month holding period which equates to 3.59 percent or and APR of 6.1 percent on top of the dividends we receive. The dividends during this holding period should amount to $3.00. When we add the two sources of income together, we get a seven-month return of 5.3 percent or an APR of 9.1 percent. I expect that we should be able to capture income of this nature for as long as we continue to hold BLK, as long as the stock is not called away from us. Now let's look at what would happen if the stock does get called away.

If the stock price exceeds $190 at expiration on January 18, 2013, we will be obligated to sell our stock for $190 per share. This would result in a gain of $14.45 per share ($190 - $175.40 basis - $0.15 exercise fee). That amounts to just 8.2 percent over a seven month period. However, in order to calculate the actual cash gained from the transactions we need to add the premium collected from selling the call and the dividends we will have collected during the holding period. So, once we add the $6.21 premium (net of commission) and the $3.00 in dividends we'll collect to the appreciation of $14.45 (net of fees) we get a grand total of $23.66, a seven-month return of 13.5 percent or an APR of 23.1 percent.

If we take into consideration the premiums earned earlier, our total return on our investment could exceed 20 percent. However, as is always the case, if the price drops even lower, we'll continue to sell calls above the level of our cost basis, when available, to keep enhancing the yield.

As always, I enjoy the comments and will try my best to answer questions if readers will take the time post them. If you are a new reader and are confused about what strategy I keep referring to please see the first article in the series for a primer. The previous two articles explaining the details of the earlier transaction discussed above can be found here and here.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.