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Write Put Digital Realty Trust (DLR)

I wasn’t able to get into PMT at favorable pricing and am substituting DLR.

music selection:  “Closer” — Nine Inch Nails

Digital Realty is a REIT that specializes in renting server space.  This is a growing company thanks to the trend towards cloud computing and towards the creation of large amount of data.  There are a lot of names in this space but I like DLR best because 77% of its revenue comes from long term contracts.  Most of the competitors are primarily on one year or month to month contracts.  The DLR contracts come with rate escalation clauses too.  This gives us a great deal of revenue certainty.  The past performance is very strong with continuous growth.  The stock has yielded over 30% annualized since inception.  Like all REITs, it pays out most of its operating cash flow as dividends and we see a rising distribution here.  The quarterly distribution has grown from 15 cents to 88 cents between 2004 and now.  The current yield is only 3.8% but there is a long runway of growth ahead of this company.

I want to get assigned and start writing out of the money covered calls on DLR to give the underlying some room to appreciate in price while collecting the growing dividend.  So I sold an at the money put, DLR161216P00090000 for 2.65 a share.  The trade will be in force for 24 days and yields 44.78% annualized.  It comes with 2.93% downside protection.  With any luck, I will get assigned and be able to write out of the money covered calls with a yield around 12-18% going forward while collecting the growing distribution.

I haven’t given up on PMT but it is currently in a price range between the 15 and 17.5 strikes where the annualized yield just isn’t very attractive.  I’ll keep watching it for an opportunity to strike.

Devour your prey raptors!

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