Charles Is Looking Like a Good Option

The brokerage business is booming. People stuck at home are trading more than ever. Sports bettors are now trading to compensate for the lack of other things to wager on. While some offices are temporarily closed, the basic business model rolls on like never before. Last year's elimination of commissions has encouraged quicker turnarounds and fueled speculation. Charles Schwab has been a big beneficiary of these trends and will become much larger soon when they close on the recently approved acquisition of TD Ameritrade . Earnings per share will be down a bit in 2020 due to lower net interest margins and the still evolving changes to income due to the elimination of commissions. Consensus estimates for this year now center on EPS of $2.03, down from 2019's all-time record $2.67. That said, SCHW fetched over $60 back in 2018, $51.65 as recently as last December and $42.82 on June 5 just weeks ago. As of Tuesday, it was available for just $34.12, more than discounting the reduced estimate. Schwab's long-term record has been outstanding. Schwab's balance sheet is solid. Profits are predictable. Since 2011, the stock carried a well-deserved average price-to-earnings of 23.5-times, accompanied by around 1.20% in yield. As of Tuesday, those numbers were 16.8-times and 2.11%. Even a partial valuation rebound could send SCHW back toward $45 within six months or so. That implies greater than 30% upside plus any dividend income earned while waiting for the upturn. Yahoo Finance calls Schwab undervalued. It calls for a very conservative 12-month target price of $38.79. That goal seems way too low to me considering the stock's prior trading history. Independent research house Morningstar is more in line with my point of view. It labels SCHW as a 4-star, out of 5, Buy. Morningstar notes Schwab's large moat and exemplary management team while calling Schwab's present-day fair value as $45.50. That goal appears quite reachable. SCHW peaked above $49 during each of the four years from 2017 through 2020 YTD. There are excellent option plays available for those who understand the game. With SCHW at $34.12, selling naked puts out to Jan. 21, 2022 at $30 and $35 strike prices would have dropped the worst-case, forced purchase prices to either $24.80 or $27.35. The shares haven't changed hands at either of those prices since the summer of 2016, about four years ago. Maximum gains on these, or any other option sales, always equals 100% of the premium collected up front. In these examples that would represent either $665 or $765 per 100-share commitment. Sophisticated option traders can do very well by setting up a Jan. 21, 2022, $35 strike price buy/write combination. That involves purchase of at least 100 shares of stock while shorting a naked put and a covered call. Details of a minimum-sized combination are shown below. If executed in a margin account with excess free buying power, the net out-of-pocket cash outlay dropped to just $1,982. If held through expiration day there are just two possible outcomes. SCHW will either finish at $35 or higher, or below $35. The first situation would trigger the best-case scenario detailed below. Any upturn of at least 2.6% from the trade inception price would deliver an 82% total return in 1.762 years. In essence, even a very modest gain in SCHW would morph into greater than 46% annualized. How cool is that? There's no guarantee that SCHW will be $35 by expiration day. If not, the worst-case scenario laid out next would play out. Barring a total collapse, though, it is still likely to produce a profit. Combination writers would end up owning 200 shares of SCHW, but at an average cost of just $26.87 per share. Future stock market action is never fully predictable. We can know for sure, however, that owning SCHW at that break-even level would have been a winning position 100% of the time dating back to before Aug. 1 2016. Schwab is a top choice for just about anybody. It's a high quality name, pays a better than CD-rate, has a sustainable dividend and appears underpriced. Outright ownership is the plain vanilla way to go. Selling LEAP puts offers a good way to make extra income right now while also buffering option writers by from 19% to 27% of downside risk. Setting up buy/write combinations sets up investors with significant upside, significant tax deferment on gains and a decent slug of downside protection.

Charles Is Looking Like a Good Option

Charles Schwab is open for business and gaining market share.

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