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New Trade – Realty Income (O) – put selling

Realty Income stock was among REITs companies beaten down recently and that is a reason for me buying shares of this company but recently I decided to take a few option trades on the paper. I believe the sell off of this company isn’t deserved.

If all the sell off of REITs these days is due to FED tampering and interest rates increasing which is bringing mREITs into trouble, why Realty Income is participating at this sell off?

Why I think this stock is a great deal

This company has nothing to do with mortgage REITs. This company is an equity REIT. It owns properties all over the country. It invest into real estate properties and make money renting those properties to private and institutional clients. Interest rates don’t affect this company in the same effect as mREITs, if at all.

The only risk I can see is that with higher interest rate this company can be purchasing new estate with higher rates which may slow them down in growth. Since the company was successful prior to the crisis when the interest rates were high, the drop in rates we saw a few years back was a cherry on top of the cake. The company which is dedicated to providing a reliable growing dividend income will definitely survive this uptrend in rates easily.

The 30% drop of the stock price isn’t deserved and in my opinion there is no reason for it. I believe the investors (mostly ignorant) are dumping this stock because they have no clue how this company is making money. They just think: “It is a REIT, let’s sell it since everybody is selling and REITs are in trouble.”

Do you remember Visa a few years ago? The government or some other regulatory agency decided to put a fee cap on credit card transactions what the issuer of the card could charge the merchant whenever you swiped the card. The investors back then slammed Visa frantically selling it although Visa had nothing to do with setting swap fees. It was the banks and credit card issuers who had a problem, not Visa.

Yet investors proved again how ignorant they were investing into businesses and having absolutely no grasp of the business model of that company. A history repeats itself.

As a long term investor I believe this company will shine (as long as those ignorants out there find out) and I want to take an advantage of it. In short time frame this company still may be quite volatile tethering around $40 a share, it may even fall lower to $38 a share or even $30 a share, but in long term this stock will go higher.

I decided to sell a long term put contract (March 2014 expiration) to give this stock room to prove my case. I collected $321 premium and I am willing to buy shares of this great company if this trade goes against me. I will be also saving cash for the case that this stock would go lower to $38 or even $30 a share (the latter is very unlikely) where I plan on buying more shares into my portfolio and even open more put trades.

Trade detail

Right now I opened the following trade:

08/29/2013 12:10:05 Sold 1 O Mar 22 2014 40.0 Put @ 3.21

No matter what happens, I will keep the premium and worse case scenario I will end up buying a company I love :)

If the put expires worthless I will realize 8.03% or 14.73% annualized profit.

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