Good profit in a bad stock. Passive income through selling option volatility.

Another real example of selling options.

There is a company Medical Properties Trust (ticker : MPW).

Medical Properties Trust, Inc. is a self-advised real estate investment trust formed in 2003 to acquire and develop net-leased hospital facilities. From its inception in Birmingham, Alabama, the Company has grown to become one of the world’s largest owners of hospital real estate with 441 facilities and approximately 44,000 licensed beds as of September 30, 2023. Since the end of the third quarter, the Company has sold four facilities and now owns approximately 43,000 licensed beds in nine countries across three continents. MPT’s financing model facilitates acquisitions and recapitalizations and allows operators of hospitals to unlock the value of their real estate assets to fund facility improvements, technology upgrades and other investments in operations.

Now the company is going through hard times.

It looks like the company is heading towards bankruptcy. Yes, the company has problems. First of all, the company has a large debt. The positive side is that the company still generates decent profit and has a sufficient number of hard assets (MPW is REIT). Assets are much greater than debts (P/B ~ 0.3). In my opinion, this is a clear example of the market overreacting. Bonds are now trading with a yield of up to 14%. In fact, the market assesses the probability of bankruptcy as not too high. I agree with it. If the company manages to successfully sell some of its assets, its debt problems will be resolved. If you are interested in a more in-depth analysis of the company, then I can recommend an excellent resource Seeking Alpha. I use it all the time in my analysis. As a result, in my opinion, the company may not exhibit very strong dynamics in the future, but bankruptcy is extremely unlikely. So what ends up catching my attention? Short answer — Implied Volatility. We have option IV in the range 80–100% depending on strikes and expiration dates. How can this be played? Let’s see option puts with Jul-2024 expiration date (245 days before expiration)

We can sell put options for strike 2.00 ( current price 4.6). If you do it for a mid-price it will be 0.23/2 — 11.5% yield for 245 days or 17%(!!!) annual yield. We will receive such a profit if the company does not fall more than twice in 245 days. To achieve a return significantly higher than the market, it’s not necessary for the stock to outperform the market; in fact, it doesn’t need to grow at all. If you want more risk and return — you can use option puts with strike 3. In that case, the annual yield will be approximately 24%.

This is an example to demonstrate how selling option volatility works. Not an investment recommendation.