Olin Corporation: More Than Just The Dividend

About: Olin Corporation (OLN)
by: Chris Messner

OLN has paid dividends for 90 years.

OLN's stock reached a 7-year low in February 2016.

2016 was a great year for both covered calls and short puts on OLN.

Olin Corporation (NYSE:OLN) is a specialty chemical manufacturer and also produces the Winchester brand of firearms ammunition. The company has paid dividends consistently for 90 years. PR Newswire reported that OLN recently announced, and paid, its 360th consecutive quarterly dividend. OLN has paid a steady quarterly dividend of 20 cents per share since May 1999, per Dividend Channel.

In 2015, on April 6th, OLN's share price reached a split-adjusted, multi-decade high of $32.11, sporting a dividend yield of 2.49%. By February 11, 2016, it hit a low of $12.56, making the dividend yield a very juicy 6.36%. Worth noting: OLN's share price hadn't been that low since 2009!

Olin had posted two losing quarters in a row, coming off its acquisition of Dow's chlor-alkali business, so traders bailed, sellers overtook buyers, and the share price declined nearly 61%, coinciding with a general market sell-off. But, Olin is a large, old, well-established corporation that produces, among other things, a highly sought-after product that had been, in recent years, in very short supply: Ammunition. Olin is not going anywhere. Translation? Opportunity!

In fact, opportunity from several different angles. First, we know OLN is a solid dividend payer. It's not a so-called "dividend aristocrat" because it hasn't boosted its dividend over the past 17 years. But it's a reliable dividend payer and a major player in its industry and, at or near its 2016 low, it was paying out around 6%, making it a nice buy-and-hold income producer.

Second, just 11 months ago, at its 7-year low, you had to know OLN was ripe for a major upward move in price. And, you would have been handsomely rewarded had you bought in. OLN closed at $27.35 on January 11, 2017, a sweet 118% upside move.

Third, as it nears its high of the past 30 years, as noted above, it could potentially be a candidate for naked call selling. The stock price will not continue to rise indefinitely.

Fourth, OLN has been, and still is, a great stock for writing covered calls and/or selling naked puts. Read on to see how I illustrate this point.

In my margin account at my online broker, I'm authorized to sell, or "write" naked, or "uncovered" puts. That means I can sell puts on a stock and immediately collect the money from the put buyer on the condition that the buying power in my account is sufficient to cover my being assigned the stock at the put's strike price.

A few words about selling naked equity options (calls and puts): Obviously, there is risk. Theoretically, if I sell naked $25 strike puts on a stock trading at $30, but the stock goes to zero before I close my put position, I'm out the entire value of the strike times the number of put contracts times 100. If I close my put position before the stock hits zero, I'm only out the difference between what I paid to buy back the put minus what I got when I sold it. Either way, the risk can be substantial.

It works in reverse for calls. If I sell $30 strike calls on a $25 stock, and the stock goes to $50 before my call position is closed or expires, I'm forced to buy the stock at $50 to sell it to the call buyer at $30. If I close my call position before the stock hits $50, I'm only out the difference between what I paid to buy back the call minus what I got when I sold it.

Additionally, with naked options, profits are capped.

Here's the upside to selling naked options: If I like OLN, for example, but I don't want to pay $27.35 per share, I can look ahead to, say, the puts expiring on August 18, 2017, and see that buyers are offering to pay 85 cents for the $21 strike put. If I'm willing to own OLN at $21, I could sell, say, 2 of those put contracts (covering 200 shares of stock) and immediately collect $170 (before commissions). If OLN stays above $21 by August 18, I keep the $170. If OLN goes to $21 or lower by August 18, I still keep the $170 but I am assigned 200 shares of OLN at $21. Selling naked puts allows you to take a position in a stock you'd like to own without having to buy the shares at a price you consider too high. And, if the strike price is never reached, you keep what you got from selling the puts for your trouble. And, you can do this over and over. If the stock never hits the strike price, you can still make nice money selling puts.

Different brokers assign different margin maintenance requirements to individual stocks based on several factors which are, most likely, unimportant to the individual retail investor. What is important is knowing your broker's margin maintenance requirements for stocks you're dealing with in a margin account. When I established my first positions in OLN, my broker's margin maintenance requirements were 35% across the board for (1) long or (2) short stock positions and (3) naked options.

That meant that if I buy 100 shares of OLN at, say, $20 per share, my broker allows me to put up $700 and loans me the other $1,300, but I may have to pay interest to my broker for the privilege of buying on margin (more on that later). IMPORTANT NOTE: Be aware that brokers can, and do, change their margin requirements on individual stocks from time to time. When they do, they will, or should, notify you, but any change in margin requirements will immediately affect any existing position you're holding. In early August 2016, my broker changed OLN's margin requirement from 35% to 50% across the board. That had the immediate effect of reducing my account's buying power, because some of it was consumed to meet the increased margin requirement on my existing OLN positions.

Here's a really important and interesting fact about OLN stock: Although OLN's average trading volume is only about 2.2 million shares per day, there is a VERY active WEEKLY options market associated with the stock.

So, on December 23, 2015, I established my first positions with OLN, as follows:

- Sold 2 puts, $17 strike, expiring February 19, 2016 @ $0.65 per share, for an immediate net credit of $118. This naked option generated a reduction of my account's active buying power by $1,190 ($17 per share x 200 shares x 0.35 margin requirement), but, again, I received an instant credit on this trade while actually putting up $0 cash.

- Sold 3 puts, $17.5 strike, expiring Jan. 29, 2016 @ $0.53 per share, for an immediate net credit of $147, also with a commensurate reduction of the account's buying power.

While these positions were open, OLN reached its 7-year low, so both of these short put positions resulted in assignment. On February 20, 2016, I was the proud owner of 500 shares of OLN, on margin (as described above), at an average purchase price of $16.77 per share, with the credits from the puts I'd sold factored in.

My next moves with OLN were as follows:

- On January 11, 2016, sold 1 put, $15 strike, expiring May 20, 2016, for an immediate net credit of $119 and a commensurate reduction of the account's buying power. This position expired without assignment, leaving the $119 as clear profit.

- On January 15, 2016, sold 1 put, $14 strike, expiring August 19, 2016, for an immediate net credit of $138 and a commensurate reduction of the account's buying power. This position expired without assignment, leaving the $138 as clear profit.

Since I now owned 500 shares of OLN (on margin), I was able to sell (write) covered calls on those shares, so:

- On January 29, 2016, I sold 3 calls, $19 strike, expiring March 18, 2016, at $0.43 per share, for an immediate net credit of $117. Since this was a "covered" options position, there was no reduction in my account's buying power. This position expired without assignment, leaving the $117 as clear profit.

- On March 17, sold 5 calls, $20 strike, expiring August 19, 2016, at $0.56 per share, for an immediate net credit of $266. This position resulted in assignment, so, upon expiration, my 500 shares of OLN were "called away" from my account at $20 per share.

After the 500 shares were sold, I had a short-term net gain on OLN of $2,270 since January 11, 2016. Keep in mind that I only had to put up part of the purchase price to own the shares. How much? Well, the 200 shares @ $17 per share cost $1,190, and the 300 shares at $17.5 per share cost $1,837.50, for a total of $3,027.50. NOTE ON MARGIN INTEREST: Brokers charge interest on margin accounts only if the account's overall cash balance is less than $0. At least, that's how my broker does it. So, you can buy stock on margin and pay zero interest if your account has a positive cash balance. In 2016, I paid only about $10 to my broker in margin interest.

Notably, you see there were no losers among these transactions, only gainers, the kind you want.

But wait! There's more!

Ah, yes. Dividends! As I mentioned earlier, OLN is a long-time, reliable payer of dividends, 20 cents per share, per quarter, since 1999. So, in addition to capital gains on the shares of stock, and the options, I also collected dividends. The 300 shares assigned to me at the end of January 2016 paid $60 in dividends on March 10, 2016. The additional 200 shares assigned in February yielded total dividends (on 500 shares) of $100 on June 10, 2016. And, although my 500 shares were called away from my account on August 20, I was the owner of record of those shares on the record date of August 11, which means I collected the $100 dividend payment on September 10, 2016, even though I no longer owned those shares. Total dividend tally for OLN in 2016: $260.

So, as of this writing, I've made a total of $2,530 on OLN in 2016 (in this one account) while putting up only about $3,027 of my cash to do it. In percentage terms, that is a gain of 83.6 percent. From start to finish, this took 228 days, so, on an annualized basis, it works out to a gain of 132% per year (360/228 x 83.6 = 132).

I think you'll agree this shows there's much more to OLN stock than just the dividend.

By comparison, had I merely bought 500 shares of OLN on December 23, 2015 for, let's say, $18.50 per share (mid-point between day's high and low) and sold them on August 19 for $20.90 (the day's midpoint), I'd have made $1,200 on the shares (before commissions) plus $300 in dividends. And, I could have sold some covered calls along the way also. So, not a bad score either way.

But wait! There's more!

When OLN share prices were nearer their 7-year low, I sold some more puts:

- On March 11, 2016, sold 1 put, $13 strike, expiring January 20, 2017, for an immediate net credit of $119.

- On May 9, 2016, sold 1 put, $18 strike, expiring January 20, 2017, for an immediate net credit of $133.

- On June 27, 2016, sold 1 put, $18 strike, expiring February 17, 2017, for an immediate net credit of $121.

As of this writing (January 18, 2017), OLN is currently trading around $26.50 per share. Barring any unforeseen occurrences, I expect these puts to expire, leaving me the credits as clear profit.

Also, selling puts that expire next year means you don't pay income tax on the gains until the year after that. Just something else to bear in mind.

Going forward, from an investing standpoint, OLN is facing some challenges. Its stock price is currently within about 20% of its high of the past three decades. Based on that fact alone, I wouldn't take a new long-term position in OLN now, certainly not for a yield which is currently just north of 3 percent.

Additionally, although OLN has posted four consecutive quarters of increasing revenue, its earnings, while positive, have come in well short of analyst estimates over the past three quarters.

OLN also took on massive debt when it acquired Dow's chlor-alkali business, and, although its long-term debt and total debt have declined three consecutive quarters, it is still massive, at around $3.6 billion, and much greater than OLN's cash pile.

Despite these issues, OLN is, as mentioned previously, an old, very well-established and well-managed company. I believe OLN will maintain its current dividend payout, but I would wait until its yield is between 4% and 5% (stock price between $16 and $20) before considering OLN shares as an income investment.

Hypothetically, if OLN's share price were to fall, say, 20% or so from current levels (which happened back in July 2016 in response to a disappointing earnings announcement), at that point, I think OLN would be an excellent choice for selling naked puts six to 12 months out with an eye toward either acquiring the shares for income at a reduced price, or simply pocketing the credits from selling the puts.

I hope this article provided you some food for thought. I wish you every success in your trading and investing activities.

Disclosure: I am/we are long OLN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.