TWO - Up/Down or Sideways, this Divi/Options Play will Make you $$$$

The Strategy Explained

TL;DR (too long; didnt read)

• Looking at stocks with high yield (big dividends 10%+)
• Yields are large enough to pay for insurance (put premium)
• Leaves a guaranteed neutral or positive return (no downside)

Option values change rapidly and these scenarios are outdated the minute I post them ... but good news! I can always find more. If you have an interest in this strategy, feel free to
give me a ring at 206-390-0375

Conclusion First:

7/23/13
TWO:$10.12

Buying TWO shares alongside the Jan 2014 $12 put will yield a risk free* minimum $.50 (about 4% in 6 months. Eat your heart out, treasuries!) with additional upside above $12 on capital appreciation. (ex stock goes to $13, you get another $1)

Bonus points (+$.35) if you write the Jan 2014 $12 call on top of it all

*see divi assumptions on bottom

Steps:

Buy TWO for $10.12/share

Buy Jan 2014 $12.00 Put for $2.00 (ask)

• $12.00 put locks in $1.88 in cap gains (paid $10.12, can sell for $12)
• ie this put has $1.88 in intrinsic value
• Time cost = premium ($2.00)- intrinsic($1.88)
• $.12 = time cost

Collect Dividends = $.62

• Sept estimated $.31 (estimated from 3 years of consistent divi payments ranging from .$.24 to $.40 and excluding special divi of $.50 )
• Dec estimated $.31
• http://www.nasdaq.com/symbol/two/dividend-history

Scenarios:

$.62 dividend income - $.12 time cost of put = $.50 of income

Profit = $.50 + (Anything above $12)

Worst Worst Case: Company doesnt pay dividends or income pass through is less than expected (this is a REIT FYI) - if this happens, the stock will drop. Excersize your put, sell for $12 and pour one out for the $.12 (1%) you lost

Worst Case: $.50 profit .....Stock drops to $1 ... excersize put, sell for $12, collect dividends

Best Case: $.50 profit + upside above $12 .... stock at $14 = $2.50 profit

Assumptions & Considerations:

Dividends are not guaranteed... I am assuming the trend of the last two quarters will continue, which puts payouts in the middle of 3 year divi range

TWO is  REIT and must, by law, pass through 90% of income... there is a chance divi payments could be less, but will almost certainly be something north of $0 .... all we need is $.12 for a netural/neutral/upside scenario

I have ignored tax implications .... this would be short term on cap appreciation, short term on put, income tax on divis ..... speak with your accountant

Ignores commissions .... Im assuming this strategy is either for hedgies with prime brokers, retail investors with discount brokers (Round trip on all under $50) or managed accounts

Special thanks to Jessica Garcia! She was of tremendous help in building the excel models to screen these options.