It’s been nearly two months since our last put sale of TSCO. At the time I noted its recent price decline. What I didn’t know then was that TSCO was just at the beginning of establishing a new, lower price channel. As you can see in the chart below, TSCO has been drilling sideways in a narrow channel relative to the rest of the past trading year, and has established a baseline of around $30/share.

A tight sideways channel is ideal for generating seemingly low-risk and easy put income, but eventually most such channels have a breakout, whether to the upside or the downside. Often the catalyst for this is an earnings report, and Tractor Supply is scheduled to report in the next week or so, on or around July 23. Because of this, the implied volatility (IV) is above 51%, versus a historical volatility (HV) just below 30%. Because of this extra risk around earnings, the option premiums are currently elevated.

Last time we sold puts on this stock, I chose to sell two contracts due to the relatively low nominal price of this stock. This time, due to the elevated risk around earnings, I chose to sell only one. There is of course the risk that earnings knock it out of the park, and that the stock zooms away from us towards its previous trading range in the $50s.

However, equally there is the risk that earnings could disappoint, and that the stock could decline further, perhaps leading to assignment, or even falling well below our $27 strike price. If that were to happen, I would then sell puts on a second tranche of 100 shares in the hopes of reducing our effective cost per share even further.

In any case, by selling only one put this time at the elevated premiums, I brought in more income than I did by selling two contracts last time while also halving the amount of capital at risk. This effectively doubled the annualized return on our put reserve, assuming we are not assigned, from 10.4% to 20.8%.

Note that TSCO options often price in $5 strike increments, especially around monthly expirations. However, there are also weeklies, and it was on a weekly where I was able to find $1 strike increments.

I believe Tractor Supply is a solid business, and that the current issues that are depressing the stock price are only temporary. In any case, its effective dividend yield is at the upper end of its historical range, what with yield rising with the inverse of price. It seems an attractive target.