Generating Income with a Buy-Write Strategy: A TD Synnex Case Study

The global IT landscape is booming, driven by increased demand for cloud computing, cybersecurity solutions, and AI. However, despite this favorable environment, some well-positioned companies, like TD Synnex (SNX), haven’t fully reflected this growth in their share price performance. This article explores a potentially lucrative options strategy, the **buy-write**, using TD Synnex as a case study. We’ll examine the strategy’s rules of thumb, evaluate TD Synnex’s prospects based on recent analyst predictions and its current market valuation, and present a concrete trade example. The core idea lies in leveraging the potential for income generation while still maintaining the upside potential of owning shares.

Key Takeaways:

• **Buy-write strategy:** Generate income while holding shares of potentially undervalued companies.
• **TD Synnex (SNX):** Currently undervalued relative to the market & offering potentially high rewards under a buy-write strategy.
• **Favorable outlook:** Positive analyst sentiment and forecasts predict above-average growth for SNX.
• **Trade example:** A concrete buy-write strategy is presented, highlighting specific options and risk/reward considerations.
• **Important caveats:** Details on managing risk, choosing expiry dates, and understanding bid/ask spreads are included in the analysis.

Understanding the Buy-Write Strategy

A **buy-write** is a conservative options strategy that involves simultaneously buying a stock and writing (selling) a call option on that same stock. This strategy is geared towards investors who are bullish on a given stock but are also looking to generate income. The investor earns a premium from selling the call option. However, if the stock price rises significantly above the strike price of the call before expiry, the investor’s profit potential is capped by the price at which they agreed to sell their shares through that call options contract. They may still profit, but the profit will be less than it would have been if the investor had simply held the shares.

Advantages of the Buy-Write

• **Income generation:** Selling call options generates immediate premium income, increasing the overall return on the investment.
• **Reduced risk:** If the stock price remains below the strike price of the calls, the investor still retains the shares and collects the premium, which reduces their cost basis in each share.
• **Partial downside protection:** If compared to simply holding shares, the premium received will help offset any loss from a drop in stock price. A significant downside risk still prevails however.

Disadvantages of the Buy-Write

• **Limited upside potential:** The investor’s profit is capped at the strike price of the call option.
• **Time decay:** Options lose value as they approach expiration (time decay). The investor will lose some of the value of the call option over time if they don’t close out their position.
• **Potential assignment:** If the stock price rises above the strike price, the buyer of the call option may exercise their right to buy the shares at the strike price, forcing the seller (the investor) to sell their shares.

TD Synnex (SNX): An Attractive Candidate for a Buy-Write

TD Synnex (SNX), a leading global distributor of IT products and solutions, presents an intriguing case for a buy-write strategy. While strong underlying market trends—such as increased demand for cloud computing, cybersecurity solutions, and AI—suggest promising growth potential for SNX, its stock price has underperformed, presenting a potential opportunity for investors who are confident in its long-term prospects but also want to mitigate some level of risk and generate additional income from their existing shares.

Positive Analyst Sentiment and Growth Projections

RBC Capital analyst Ashish Sabadra notes that SNX’s operating performance is poised to improve, driven by increasing IT demand. Analysts project a **5.6% YoY revenue growth** for fiscal year 2025, and a **10% YoY net income growth**, translating to an adjusted EPS estimate of **$12.80/share**. They project **free cash flow of over $1 billion**, resulting in a potentially attractive **free cash flow yield of almost 10%**.

Undervalued Valuation

Currently trading at a **forward P/E ratio of just 9.5x**, SNX appears significantly undervalued compared to the S&P 500’s valuation of over 25x. This low valuation suggests that the market may not fully be pricing in the company’s growth potential, potentially offering a compelling entry point for investors interested in a buy-write strategy.

Buy-Write Rules of Thumb and a TD Synnex Trade Example

When implementing a buy-write strategy, certain rules of thumb can significantly improve the success rate. Choosing the right expiration date and strike price is crucial. Given that TD Synnex options trade with modest volumes, investors need to be patient and flexible.

Key Considerations for Implementing a Buy-Write

• **Expiration Date:** Select an expiration of **less than 90 days**, preferably avoiding dates close to significant catalysts (like earnings reports). In TD Synnex’s case, the earnings report is before the open, eliminating this concern.
• **Strike Price:** Choose a strike price that offers some **upside participation** if the stock price increases. This balance allows for profit gains along with the call premium received.
• **Premium Justification:** Ensure the premium received is large enough to justify foregoing some upside potential. In other words, the generated income should be worth the limitation of profit potential due to the strike price on the call option.

TD Synnex Buy-Write Example

Considering the above, a suitable buy-write strategy for TD Synnex (SNX) could be structured like this:

• **Action:** Buy 100 shares of SNX at the current market price.
• **Action:** Sell 1 SNX February 21, $130 call option.

By placing this order, the investor effectively establishes a position that will collect a small amount of cash and will allow the investor’s stock gains to be capped at $130. At the time of this analysis, at a mid-market price of $126.50/share, this trade looks to collect the investor ~$2.75/share in premium. This represents more than a 2% return just from the sale of the options contract. Further investigation into the likely cost basis should be performed by the prospective investor.

Important Disclaimer: This information is for educational purposes only and does not constitute financial advice. The buy-write strategy carries risk, and the potential for loss always exists. Consult with a qualified financial advisor before making any investment decisions.