National Australia Bank’s annual dividend of $1.98 puts it on a 11.10% grossed up yield (including franking credits). In the current fragile market, that high yield can be quickly dissipated with further falls in the share price. So, if you were bullish NAB and wanted to protect the downside, you can buy a put option with an expiry date just past just past the ex-dividend date – in this case the 29th November 2018.
Now the rule for getting the greatest protection by buying put protection and still being eligible for the franking credits is that you need to be exposed to at least 30% of the underlying price move at the time of the trade. In other words, the delta of the trade needs to be at least 30%.
If the stock has a delta, by definition, of 1, then the put option delta can be up to .7.
The stock has a delta of +1 and the put option has a delta of – .7, giving a net delta of .3.
Looking for a November 29th NAB put with a delta of .7 we find the NAB $25.51 29th November put.
The other rule for being eligible for franking credits is that you must be “at risk” for 45 days, not including the day you buy or the day you sell, so in effect you need to hold it 47 days.
The 29th of November is only 45 days away, so you would need to hold the stock an extra 2 days. We can manage that risk, depending on the share price at the time, by rolling the put for a week but only if required.
Having placed the trade into the market today the prices achieved were:
Buy Stock: $25.48
Buy $25.51 Put: $1.28
Estimated Dividends: ($0.99)
Estimated franking credits: ($0.42)
Cost of trade: $25.35
As you have an option to sell the shares at $25.51, you can see that your downside is covered by about $0.16c and, in addition, you get the benefits of a rising share price. Remember, only put on this trade if you are bullish the stock and you are eligible for the franking credits. Also, you should use your adviser to assist you in managing the risks should you chose to place this type of trade.