What Are the Best Public Storage Options?

Last July, I liked the prospects for Public Storage , a REIT specializing in self-storage space. The data below reflect what PSA looked like as of July 6. At that time, PSA traded for $205.36 per share and 2017's funds from operations (FFO) were expected to come in at $7.50 per share, rising to $8 in 2018. My 18-month target price was set at just above $246. The day before, I had sold some PSA Dec. 15, 2017, expiration date $210 puts at $11.70 per share. Break-even on those option sales was $198.30 ($210 strike price less $11.70 put premium). The original graphic from my article at that time is shown below. For selling PSA Dec. 15, 2017, $210 puts, I pocketed $1,170 per 100-share contract for standing ready to buy shares of Public Storage, if exercised later. About 5½ months have gone by, with PSA still hovering around the same level as it was back in July. PSA closed on Nov. 17 at $211.85, just half a percent higher than it was on July 5. Since July, PSA's FFO estimates for this year have been trimmed from $7.50 to $7.20 while 2018's expectations remain steady at $8 a share. As of Nov. 19, there were only 19 trading days left until expiration. What choices do I have regarding disposition of my option obligation? Do nothing. Wait to see if PSA holds above $210 through Dec. 15th. Buy to close, locking in a decent gain while extinguishing the obligation to buy PSA. Roll out to the same strike price but for a later month. Roll out and down to a lower strike price, reducing the risk of potential exercise. Each choice offers both positives and negatives. Simply letting things ride makes it possible to capture the best-case scenario result from the July 5 sale. That will play out if PSA holds at $210 or better through Dec. 15. The risk in waiting is that PSA could fall below $210, making me liable to lay out $21,000 per contract to buy shares between now and Dec. 15th. Note that even if put, the resulting stock position could be immediately liquidated for a profit as long as PSA holds above $198.30. True risk kicks in only if PSA drops to below its break-even point. As of Nov. 17, the December $210 put could be bought to close at about $3.76 per share, or $376 per contract. There's nothing wrong with that. The net gain would be almost $800 per contract. Game over. Closing four weeks early removes any risk of being exercised. The $794 profit represents 67.9% of the maximum percentage gain that would have been achieved had the option gone on to expire worthless. The only downside of BTC (buying to close) is giving up the chance to capture that extra $376 per contract inn potential gains. Door No. 3 involved a calendar rollout from December 2017 $210 puts to June 2018 $210 puts. Doing this requires BTC the near-term expiration while selling a replacement put for a six-months-later expiration date. The actual Nov. 17 prices on that were paying $376 to close, while receiving $1,320 for writing the new, longer-dated $210 put. From start to finish, I'd now have sold twice while buying only once. The net dollars rise to a $2,114 inflow while the commitment, standing ready to buy 100 PSA at $210, remains unchanged. Break-even, from the original trade inception date, thus declines to $188.86 ($210 strike less $21.14 in cumulative net put premiums) rather than $198.30. Moving the expiration date six months further into the future accomplishes three things: It removes the worry about what PSA will do over the coming four weeks by elimination of the Dec. 15, 2017, deadline; it lowers the overall break-even point by $9.44 per share; and it increases the maximum potential gain to $2,114 from $1,170. What's the downside associated with rolling out the put? I'd be assuming an extra half-year of risk that something bad happens to PSA shares while the newly extended option remains in place. It's not impossible that PSA will drop drastically. We can know for sure, however, that the stock hasn't changed hands below $192 in more than two full years. The final choice, rolling the December 2017 $210 put out and down, is a risk reduction move. That requires BTC the December $210 put while selling a lower June $200 strike price put. The math on these trades is shown below. The $900 brought in for the longer-term June $200 put more than pays for the closing transaction on the December $210 put. The start-to-finish net cash inflow goes up to $1,694 even as the commitment to buy is reduced by $10 per share. Start-to-finish maximum profit ends up at $1,694. That's lower than what is available on the level strike rollout, but it's still higher than the original $1,170, which was the best-case result on the December expiration. The risk reduction comes via the reduced strike price. If eventually exercised, I'd pay only $200 per share less the cumulative $16.94 net per share collected from the STO transactions and the single BTC. From the trade inception date through any exercise, the net out-of-pocket cost would now be just $183.06 per share. Public Storage's absolute, and very fleeting, low since 2014 was $182.10. There you have it. There are four ways to go, all of them offering excellent risk/reward. The entire process works in favor of option sellers. They start out with cash in hand and built-in margins of safety. When rollouts are desired, or needed, option writers get paid again rather than paying up again, as happens to option buyers. I often close out early to avoid the artificial deadline that expiration dates impose.

What Are the Best Public Storage Options?

Here are 4 choices, each with positives and negatives for this borderline trade.

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