Country’s Largest Landlord Throwing Off a 37% Yield for Select Traders

The recent pullback in small-cap stocks has introduced a significant amount of risk for the overall market. Many view the Russell 2000 index — a good proxy for small caps — as a leading indicator for the large-cap indices like the S&P 500 and Dow Jones Industrial Average. 

Last week, the Russell 2000 experienced a 4% haircut. While a number of things can be blamed for the fall, the upcoming earnings season and the prospect of higher interest rates are two issues that are weighing heavily on investors’ minds.

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Using a put selling strategy, the added fear and rebound in volatility certainly gives us an advantage over traditional long-only investors. Namely, a heightened sense of uncertainty helps to boost option premiums, which in turn, gives us more income when selling put options.

Today, I have a put selling opportunity that could generate 37% a year while holding up very well in an environment of rising interest rates.

Stephen Schwarzman is one of the most successful and widely respected investors of our generation. The private equity manager has amassed a personal fortune estimated at $10.5 billion, and he continues to build his empire through his publicly traded company, Blackstone Group (NYSE: BX)

Blackstone manages $266 billion in private investment funds for wealthy and institutional investors, and the company has the benefit of charging fees, as well as profit-sharing incentive allocations, on the funds managed. 

Over the past several years, BX has become the biggest buyer of single-family homes, purchasing more than $8 billion dollars’ worth of these properties. The majority of the homes were purchased at distressed prices as foreclosure rates rose and mortgage companies were willing to sell these homes cheaply to get them off their balance sheets.

The firm’s level of home purchases has decreased drastically as prices have rebounded, but it has taken the title of the largest single-family home landlord in the United States. Ultimately, BX may sell these homes at a fat premium to the purchase price. But for now, the company (and the investors in Blackstone’s funds) can sit back and enjoy the rental income from this gigantic real estate portfolio.

BX has been trending higher over the past two years as investors realized the strength of the company’s bet on residential real estate. Shares are finally within striking distance of their post-IPO highs in 2007.

BX Stock Chart

Given the stock’s 4.2% dividend yield and bright prospects for the rental market, as rising interest rates could make it more difficult for families to purchase homes, I expect the stock to hold up well and continue its long-term bullish trajectory.

BX is currently trading a bit above $33. I recommend that we sell the BX Aug 33 Puts with a limit order of $1, which should give us a 37% per-year rate of income.

By selling these put options, we are accepting the obligation to buy 100 shares of BX per contract at the $33 strike price if it is trading below this level when the puts expire on Aug. 15. To cover this potential obligation, we will need $3,300 per contract.

Since we are receiving $100 per contract from selling the puts, we will actually only need to set aside $3,200 of our own capital in case shares are assigned. Assuming BX remains above $33, the $100 in income represents a 3.1% return over the $3,200 in capital we are putting aside.

Because we can generate 3.1% over a 31-day period (the number of days until the puts expire), this nets out to a 37% per-year rate of return. That’s almost nine times as much income as your average dividend investor!

If BX declines below $33 and we are required to purchase the stock (at a net cost of $32 per share), I believe this would be a good investment. Blackstone’s real estate portfolio is impressive, not to mention the other private equity deals the company has access to. Ultimately, shares should rebound and give us a profit. In the meantime, BX pays an attractive dividend and we could increase that income by selling covered calls against our stock position.

So despite the added risk and volatility in the market, a put selling strategy for BX looks like a low-risk bet with an attractive level of income.

Note: If you’re looking for more income trades to take advantage of the current market environment, my colleague Amber Hestla has closed 52 straight winning trades using this strategy. You can see her entire track record and learn exactly how you can make the same winning trades yourself by following this link.