Paramount Global: Locking In Options Premium (NASDAQ:PARA)

Written by Nick Ackerman. This article was originally published to members of Cash Builder Opportunities on February 11th, 2023.

Paramount Global (NASDAQ:PARA) has continued to be a volatile stock. It was surging with the rest of the market at the start of the year. Over the last year, it has collapsed by almost 40% despite that strong move, but shares are well off their lows we saw a couple of months ago. Even more recently, we’ve seen Paramount Global shares come down after topping the $25 level.

With that said, we had our written puts expire worthless with PARA at the $16 strike. That locked in our option premium with the passing of the latest weekly options expiration.

This latest trade was entered into on January 6th, 2023. We collected $0.32 at the time. That worked out to a potential annualized return of 20.86% if we could make a similar trade over the course of a year. With PARA, this is quite possible and isn’t so far-fetched. We’ve regularly been able to get these types of PAR results.

However, this latest trade was actually considered a roll because it was strung with closing a previous trade. Actually, not just one previous roll trade but two. This is where it can get a bit tricky to follow, so I’ll keep it concise. This string of trades actually goes all the way back to October.

• October 5th, 2022, we sell PARA puts at a $16 strike to collect $0.32.
• November 4th, 2022, shares are sliding and going below our $16 strike. We roll, and closing the position costs $0.58. We roll down to $15 and out to the January 20th, 2023 expiration collecting $1.23. Net collection in this trade was $0.65, but we also collected $0.32 previously for a total premium of $0.97.
• January 6th, 2023, got us where we are, expiring worthless today. However, it came by closing the January 20th, 2023 trade for $0.05. Essentially meaning the premium received became $0.92 with the $0.32 for the latest trade or a net premium of $1.24.

In the end, to put it all together, this series of trades would have brought in $1.24 in premium over 130 days if followed along for each one. Using the $16 strike price, that was where we originally started, meaning that the PAR arrived at 21.76%.

That’s simply an end to that previous series of trades and where we are today.

Previous PARA Trades

PARA, being quite a volatile stock, is one we’ve been playing with for a while now. That’s how we previously ended up with a long position through selling puts. They have weekly options, and most strikes nearer the money are liquid.

To make it even more complicated and go over more history of our trades, we’ve taken a batch of shares previously that we wrote calls on recently. That brought in another $0.32 in options premium. At the $25 strike price, the shares actually surged above that level – but that trade doesn’t expire until March 3rd, 2023. Meaning that it is still an outstanding trade.

However, there are now 7 total trades rolled or expired that involved selling puts or calls on PARA. It brings out the total premium collected to $3.26. The initial trade goes back to June 28th, 2022. During that time, PARA paid two dividends of $0.24 or $0.48. We even received the Q4 dividend with our long shares.

That ultimately means that we’ve generated around 6.8x what we would have from the dividend during this same period. While I wouldn’t necessarily advocate an investor do this with their entire portfolio, it helps highlight why I feel it can be worthwhile to write options in at least some of your portfolio.

Even better these days now because if you are sitting in cash, most brokerages are paying something these days. If yours isn’t, move to a different broker. As of writing this, Fidelity is paying 4.18% on the cash that is set aside for writing cash-secured puts. So that cash itself earns a decent return before we can redeploy it in another trade or eventually get assigned.

I don’t mind holding PARA shares for what it’s worth, either. On that front, they are also generating a dividend yield of 4.45%. However, the safety of that dividend is questionable. Generally, you sell puts only on a position you wouldn’t mind eventually going long on. That doesn’t mean you can’t roll perpetually, potentially never taking assignment.

Why Is Paramount Global Struggling Anyway?

Paramount Global earnings are coming up on February 16th, so I won’t spend too much time on the fundamentals with fresh quarterly data coming so soon.

That being said, to touch on it lightly, PARA’s big push is into streaming as it competes with Netflix (NFLX) and Disney (DIS). These two competitors have some deep pockets that make it harder to compete with them. That’s one of the big things working against PARA, as they are spending billions on content while the legacy ad business deteriorates.

Investors are anticipating a continued slowdown of advertisement, with a recession looming. It’s one area where companies can cut costs and see relatively limited damage. PepsiCo (PEP) and Coca-Cola (KO) not advertising on TV networks for a couple of quarters isn’t going to make consumers suddenly forget their brands and stop buying them.

Here’s a look at their Direct-to-Consumer division during Q3, which includes their streaming services. Paramount+ is the core pillar of that front. Showtime is going to be merged with Paramount+, so it will become even larger.

Now, here is a quick look at the Q3 TV Media results. Unlike streaming, it is profitable but shrinking.

Simply put, we have a profitable part of their business shrinking while a segment of hopes and dreams (streaming) is costing them billions and is unprofitable thus far. While streaming certainly is the future, it is an uncertain one. There has been massive revenue growth, but when it becomes profitable is to be determined. They must continue spending billions to bring on new content, or subscribers leave.

Analysts expect for the next two years that EPS will continue to deteriorate before growing again. At this point, it would suggest that analysts believe that either streaming starts to generate a profit in those years or they stop spending as much as they are now.

However, these EPS estimates continue to shrink regularly. In December, when we last looked, fiscal 2022 was anticipated to be $1.98. For fiscal 2023, they expected $1.38 in earnings, and fiscal 2024 was put at $2.10. So we see another reduction in the coming years of expectations.

With diminishing profits, the Paramount Global’s $0.96 annual dividend comes into question. They could cut it to free up more cash to throw at streaming. They aren’t a company that is as committed to their dividend as some others. In fact, it hardly gets brought up in their quarterly earnings calls.

With negative free cash flow, the picture becomes even grimmer. So a cut wouldn’t be something that would surprise me. Since I hold this in my speculative portfolio, it isn’t the end of the world for me, and it wouldn’t make me sell.

What’s Next?

With these puts expiring worthless, we now have some more cash for cash-secured put writing. PARA is on the list of names I wouldn’t mind adding to my position and even lowering my cost basis. In hindsight, taking assignment at $16 wouldn’t have been a bad idea considering where we are now. However, at the time, the momentum to the downside was pretty extreme too. Thus, if it had come to it, taking shares at $15 would have been better when we rolled down.

Anyway, that’s history. Here are a couple of ideas that could be worth considering. The main caution here is with earnings coming up. We are getting juiced-up premiums for selling puts due to that because the expectation for potential assignment is greater. If we see poor results, shares could plunge. On the other hand, good earnings could see the shares pop.

Additionally, we know how liquid options are for PARA, so it can generally easily be rolled if one wants.

• March 17th, 2023 expiration, going aggressive at a $20 strike could net an investor $0.87. For going bold, that would put the PAR at nearly 47%.
• March 17th, 2023 expiration, going more conservative at $17.50 could result in a premium of $0.34 and a PAR of 20.86%.
• On the nearer-dated weekly expirations, you can get even more aggressive. If one is confident in PARA or doesn’t mind taking shares at $21.5 with the March 10th, 2023 expiration, one could collect $1.20 for this at-the-money trade. Of course, that premium received would reduce your breakeven to $20.30, providing some downside cushion alone. In that case, your PAR explodes in this YOLO-style trade to 75.45%. The chances of being able to replicate that same trade over a year aren’t very realistic, though.