This is the third edition of “Best Ideas for Options” as a monthly feature in Canadian Edge. We also presented some Canadian option trades at the annual summit in Las Vegas. So far, so good: we’re building up a nice track record of success, and we hope some of you have participated in the overall very profitable strategy.

Let’s look at the results so far. The first four trades listed in the table were recommended at the Las Vegas summit on May 12, and they have all been closed at handsome profits. The next four are the trades presented in Canadian Edge since June. We have closed three of these trades, again with good profits, with the fourth still open.

Now let’s turn to this month’s recommendation.

Raspberry for Thomson Reuters

Investment thesis: Thomson Reuters Ltd (TSX: TRI, NYSE: TRI) is a true blue Dividend Champion. But its recent results indicate that the company has hit a dry patch and may struggle to increase profits in its main divisions over the next few quarters. Thomson Reuters also recently sold one of its core divisions, which will leave a profit hole that will only be partly filled by share buybacks and interest savings from debt reduction.

Meanwhile, the share price has performed well over the past two years, adding about 35%. This has brought the stock’s valuation closer to its international peers, and the dividend yield has dropped to 3.3%. We don’t see much short-term upside potential from this point and expect the stock price at best to move sideways for the foreseeable future.

Option Strategy: Sell to open a covered call option with a strike price of C$58 expiring on 18 November 2016 to receive a C$44 premium per option (C$0.44 x 100). In addition to the option premium, shareholders will earn two dividends (US$0.34×1.31 = C$0.442 per share) before the option expires (except if the call is assigned before the dividend registration date) plus any capital appreciation up to the call strike price.

Outcomes: If all goes according to plan, the option will expire worthless on November 18 (i.e., the share price stays below C$58), the income yield will be enhanced to 2.5% over the 102-day holding period (which is the equivalent of 9.03% annualised, versus the 3.3% dividend yield on holding the stock only). In addition, the strategy will allow for a capital gain of up to 7.1% for a total maximum return of 9.6% until the expiry of the option. An early exercise of the option (assignment) by the option holder could prevent the dividend payment to the option seller; in that case, the total return will exclude the receipt of the dividend.

The graph shows the possible outcomes for a range of TRI share prices at the expiry date. If the share price ends above the strike price at expiration, the option seller will have to deliver the covered shares and will effectively lose any capital appreciation above the strike price. The total return in that case will be the equivalent of the gain up to the strike price, plus the dividend, plus the option premium. So if the share price ends at C$58, the total return on the pricing metrics indicated above will capped at 9.6%.