If you’re interested in both boosting your income AND reducing your risk at the same time, you really need to consider making a “10% Trade.”
Here’s what I mean…
Compare the results of the following two Mattel (MAT) trades. The first is a theoretical Buy and Hold scenario. The second is a real-life, real-money “10% Trade” I recently made.
Trade #1: Buy and Hold (theoretical trade)
On May 19, MAT was selling for $38.96 per share. If I had bought the stock at the market price, like what most investors do, I would have since collected $0.38 per share in dividend income. Excluding any commissions, that dividend income would have reduced my cost basis to $38.58 per share. The problem is, MAT has sold off since then and is currently trading around $35.69 per share. Even counting the dividend, I’d be sitting on an unrealized loss of about 7.5%.
Now consider the trade I actually made…
Trade #2: “10% Trade” (real-life trade)
On May 19, I made a “10% Trade” with MAT. At the time I entered this trade, the stock was selling for $38.96 per share. But instead of buying the stock outright, I sold a cash-secured put (actually, three of them). What this means is that I agreed to buy the stock at a pre-determined price on a pre-determined date in the future. In this case, I agreed to buy 300 shares of MAT for $37.00 per share on July 19. If the stock was trading below $37.00 per share on July 19, I would be obligated to buy 300 shares at $37.00 per share. In exchange for my purchase agreement, I was paid $0.65 per share. As it turns out, MAT was indeed trading below $37.00 per share on July 19 so the contract was executed and I was “put” (or assigned) shares at the contract price of $37.00 per share.
At the end of the day, this “10% Trade” allowed me to collect $195 in instant income ($0.65 per share X 300 shares) while waiting to buy MAT at about a 5% discount to what it was selling for at the time I made the trade ($37.00 per share vs. $38.96 per share). Excluding any commissions, the income I collected ended up reducing my cost basis to $36.35 per share.
Again, MAT is currently trading around $35.69 per share today. But thanks to the “10% Trade” I made, my unrealized loss is now just 1.8%. Compare that to the Buy and Hold investor who would be down 7.5%.
But it gets better…
From here, I can simply sell covered calls on my shares to boost my income and reduce my risk even further.
In fact, that’s exactly what I did with the “10% Trade” I made yesterday with the very same 300 shares of MAT that I was assigned on July 19.
[hana-code-insert name=’adsense-article’ /]Yesterday’s “10% Trade” involved selling three October 18, $37.00 covered calls for $0.55 per share.Excluding the commissions, the $165 in covered call income I collected immediately yesterday ($0.55 per share X 300 shares), coupled with the $114 in upcoming dividend income ($0.38 per share X 300 shares), will have reduced my cost basis to $35.42 per share.
With MAT trading around $35.69 today — and assuming the stock doesn’t go lower from here (see chart below) — that’s enough income to move my position back into the black.
So while the average Buy and Hold investor would be sitting on a 7.5% loss today, the “10% Trader” could be breaking even.
As you can see, not only can a “10% Trade” help boost your income, but it can also help reduce your risk by lowering your cost basis.
I’ll continue to keep you posted as I make these trades. Just please keep in mind that they aren’t intended to be specific recommendations. Everyone has different financial situations, risk tolerance, goals, time frames, etc.
Greg Patrick
TradesOfTheDay.com
