I have mentioned the virtues of Gladstone Commercial (GOOD) many times in my Real Money column. GOOD, a REIT, reported 1Q23 results this week that were indeed "good," and my faith in the company's ability to continue paying the monthly dividends on its (GOODO) and (GOODN) series of preferreds was bolstered by the confident words from David Gladstone and his team on GOOD's earnings call Thursday.
There is another way to play the extreme stability of GOOD in a world that seems to have gone crazy, especially among U.S. regional banks. The buy-write. I love this strategy, and even fired up my personal Robinhood (HOOD) account to do the following trade today:
I just wrote GOOD 12/23 calls and received a $0.68 premium. Robinhood only offers options thru year-end 2023 on GOOD, but a wiser call would be to go further in the future.
If you bought GOOD at last trade price of $10.58 and wrote the calls (Robinhood has no commissions) you would be locking in a "net price" of $10.90 ($11.58 - $0.68)
At that level, with a $0.10/monthly dividend you would have a an 11.0% "simple yield."
I believe Gladstone Commercial is extraordinarily safe now, and am even more convinced after listening to their conference call this week. Frankly it was kind of boring.
Boring is exactly what you want when you are doing a buy-write!
But, of course, there are no free lunches on Wall Street. Because of GOOD's massive monthly common dividend payout and relative illiquidity, those 12/23 $12.50 calls were actually bid at $0.60/ask at $0.75 when I bought them, which is far less than the difference between the current price and the strike price.
If you did the same calculation with Tesla (TSLA) , you would find that December calls that are out-of-the-money by the same 8% as my GOOD calls were actually trading at twice the level ($24.55 vs about $12/shr difference between TSLA today of $168 and the $180 December strike price) of the difference between the current price and the strike price. This is the time premium of an option.
Dividends throw that completely out of whack, but dividends also give GOOD a cash-generative quality that Elon's stock will never offer.
Let's use Gladstone Commercial as our ATM here. The great thing about writing calls is the time decay factor. Time is always working in your favor when you are short calls, even if the time premium is currently intangible. That $0.68 option premium that I received today would, if an options fair-value model is applied, translate to less than $0.30 if GOOD traded at the same level in September as it is today, which is a definite possibility. If you write a call and it halves in value... you are halfway to the fabled "infinite profit" (on the call itself not on the total position - no trade is that good) that options-writers dream about.
Our short options will always decay and our long GOOD shares will always grow our wealth, because of the monthly dividend payments.
In this scenario, you don't want a stock to jump, as the calls will increase in value, and you will have serious FOMO as your total position gain will lag the "naked" gain of the underlying shares themselves. Nor, do you want the stock to fall sharply, as the $0.68 premium we receive only offers us a 5.9% cushion versus a decline in GOOD's current price of $0.58
Again, boring is best, and GOOD is pretty darn boring. To maximize returns, you also want to find a stock with a relatively low absolute share price (options contracts are denominated in lots of 100 underlying shares) so you can write more contracts per position, very little volatility form the underlying shares, and a strong dividend, which if reinvested, actually grows your yield on the position, which even on a "simple" basis is 11%.
In the ideal scenario, the options contracts you wrote will expire worthless in December... and then you just repeat the process. Theoretically, it should work forever. Also, assuming you take the process from your GOOD call-write and investing those in more GOOD, you will eventually build up enough "extra" GOOD shares that you can start writing 11 calls on your underlying position every six months instead of 10 calls, and then 12 instead of 11, and so on. The power of compounding is a formidable thing.
Gladstone Commercial collects rents and, after expenses, pays those rents out in the form of monthly dividends to common and preferred shareholders. It is an incredibly stable business, and that is reflected in GOOD's trading data. According to MarketBeat.com, Tesla's beta is currently 2.01 (beta is typically calculated on a monthly basis over the trailing five years) and GOOD's beta is 1.12.
So GOOD fits all the criteria. It is the perfect buy-write candidate. I am doing that today. Excelsior!
