I came across an interesting trade that I wanted to get thoughts on. It centers around Albemarle's mandatory convertible preferred stock ALB-A. This preferred stock pays a roughly 6% dividend, which is decent, but nothing crazy.
Where it gets interesting is knowing that this preferred stock will convert to ALB in Mar. '27. This preferred stock essentially has a mandatory put option built in. This presents an opportunity to sell an ALB call option on a similar timeline. By my math, one could lock in a 10-20% return as long as ALB doesn't drop below $100 from its current $147. Here's how it works:
1. Buy 263 shares of ALB-A today for $16,100
2. Sell an ALB call option for Jan. '27 with a $100 strike price for $6,300
3. Collect $1,192 in ALB-A dividends between now and conversion
4. Reinvest the $6,300 in something safe like SGOV for an additional $250
5. Either close out the positions in Jan. '27 or roll the call option to Mar. '27 after the conversion has happened
6. Conversion happens in Mar. 27 when you'll get between 100 and 120 shares roughly
So what are the potential outcomes here? If the share price is above $130, you'd make just under 10%. If the share price falls to $100, you'd make around 20%. The biggest risk is it falls to around $73 or below, at which point you'd start losing money. Ultimately no downside risk until ALB falls more than 50%, and potential returns of 10-20% as long as it doesn't fall more than 30%. Now, could it fall more than 50%? Absolutely. In fact it was around that range as recently as August, but I believe demand for lithium will provide price support.
What else haven't I considered?