Medtronic's Bullish Prospects Make It A Good Covered Calls, Cash Secured Puts Dividend Stock

Pick good undervalued dividend stocks with active and liquid stock options that can be used to generate weekly and monthly income by selling covered calls and puts options.

By Donald E. L. Johnson

Cautious Speculator

• With the markets still looking a bit bearish, dividend stock and income investors might consider Medtronic (MDT).

• Investors can buy the stock and wait for it to run up or fall before selling covered calls or puts.

• Income investors can buy MDT and sell covered calls right away.

• Speculators looking to buy MDT at a discount can sell cash secured puts.

• Some income investors might buy the stock and sell covered calls and puts at the same time with the idea of averaging the price down if MDT corrects for awhile.

• If the calls and puts aren’t exercised, collect the premiums and repeat the trades for more options premium income

When Valuentum.Com publishes a bullish stock report on SeekingAlpha.com as it just did with its write up on Medtronic (MDT), I check to see whether it’s a good dividend stock and prospect for selling covered calls and cash secured puts for options premium income.

MDT’s chart is bullish, and the stock is close to being over bought. MDT may be due for a correction.

Using its discounted cash flow calculator, Valuentum’s fair value estimate for MDT is $103. It thinks the stock would be a very good buy at $82 and it would be over priced at $124. MDT closed Friday at $94.82, down about 7.1% year to date. Its dividend yields 2.87% and it is trading at a 21.5 price to free cash flow ratio, which looks a bit expensive. At $85, the P/FCF ratio would be about 19.

On StockRover.com, the FVE is $111 to $113. The mean Wall Street analysts’ target price is $113. The company recently reported disappointing earnings due to supply chain problems. Those problems are expected to be resolved sooner than later.

I have subscribed to both Valuentum and Stock Rover for years and use them to pick stocks.

There are a lot of ways to trade MDT. It all depends on a trader’s financial goals, tolerance for risk and financial resources.

One way to do the trade is to simply buy the stock and let it rise or fall for awhile before selling covered calls or puts on it.

This would eliminate having the stock called and watching it to continue to rise after it was sold.

If the stock fell, it would be easier to quickly cut losses short by selling it if the trader wanted get out of it without messing with the covered calls. Also, if the stock falls, an investor could buy more shares at a lower price and sell puts at a lower strike.

A buy and write covered calls trader (b/w) could buy MDT at about $94.82 and:

1. Sell MDT 8.19.22 (4 days) expiration $96 strike calls for about $0.37, or an annualized return on risk of about 24%. The delta would be about .29 and the probability that the stock would close out of the money and the option would expire worthless would be about 71%. A .29 delta suggests that there is about a 29% probability that a stock would close above the strike and that it would be called. When a stock is called, it is sold to the owner of the call.

2. Sell MDT 9.16.22 (32 days) $97.50 calls for about $1.46, or an ARoR of about 16.5% if not called. The delta would be .35 and probability of closing OTM would be about 67%. If the stock closed on expiration day above $97.50 and it was called, the short-term capital gain would be about 2.9%.

Investors looking to buy MDT at a discount and willing take the risk that it will run away on the upside before they buy the stock could sell cash secured puts.

1. Sell MDT 8.26.22 (11 days) $92.50 puts for about $0.23, or an ARoR of about 13.8% and margin of safety of about 2.5%. MOS is the stock price minus the strike price, or $94.82-$92.50. The delta would be -.28 and the OTM probability would be about 83%.

2. Sell MDT 9.16.22 (32 days) $85 (delta -.11) puts for about $0.48, or a 5.44% ARoR. Generally, the shorter the duration of an options trade, the higher the annualized return on risk. The probability of the stock closing out of the money and having the option expire worthless would be about 87%. The MOS, or the discount on the stock if was assigned at the strike price, would be about 10.4%.

LINKs:

Home Page. See previous articles on other stocks and watch lists. If you read several of these articles, you’ll learn how this strategy is meant to work. No guarantees. Links to useful web sites are on the lower right corner of the home page. Scroll down.

Read about some of the trades that I did last week on the home page.

20 Ideas for Adjusting Your Stock and Bond Portfolio, by Christina Lourosa-Ricardo.

How to Beat Inflation Tax, Bear Market Tax With Dividend Stocks, Covered Calls, Cash Secured Puts, by Donald E. L. Johnson.

Wars Breed Inflation, Rising Interest Rates, Market Turmoil, By Donald E. L. Johnson.

Ways to use StockRover.com to analyze stocks

Calls vs Puts Options: What’s the Difference?

How to trade the wheel.

A video on how to place options trades on Think or Swim.

Beware. Like all investing, trading stocks and options is risky. I’m an active private speculator who trades covered calls and sells puts on stocks for my accounts. I am not a professional analyst nor a financial advisor. I don't take and won't take responsibility for how other people trade. This article is for educational purposes only. It is not advice. The data presented looked accurate at publication time except for intra-day fluctuations, but I can’t guarantee the accuracy. Traders should do their due diligence. I own and/or have options positions on IWM, DIA and other equities. I don’t have any positions or business relationships with Medtronic. I reserve the right to trade any of the listed stocks and options at any time. I receive no compensation for producing this content nor for any links.

@realDonJohnson. Because I don’t want to litter subscribers’ in boxes with emails, I write only one or two newsletters a day. I’m active most days on twitter where I tweet about stocks, options trades and other topics.