Similar to what I recently pointed out with Wal-Mart, Target (TGT) shares have been on a roller coaster ride so far this year…
The good news is, these ups and downs — and general sideways movements — have been favorable for some well-timed “10% Trades.”
Consider just the two that we’ve made public here in Trades Of The Day…
Added up, our “10% Trades” with Target have generated a 4.2% yield in a total of just 88 days. That may not sound like much, but it works out to a 17.4% annualized yield — in a year where the stock is actually down.
In other words, these trades are doing exactly what they’re supposed to: generate safe, 10%-plus annualized yields. Take a look…
While I already own Target in my long-term dividend growth portfolio — and plan on holding it for the long-haul — I’m always open to potential “10% Trade” opportunities with the stock that could continue to both boost my income and reduce my risk.
With this in mind, I made another “10% Trade” with Target yesterday.
One neat thing about this trade is that since I made it my Roth IRA, it essentially served as a legal “backdoor” way to contribute extra money to that account even though I’m no longer eligible to. I’ve explained how this works before.
Another neat thing it is that I’m getting paid for simply agreeing to buy the stock for the same price that I just sold it for, which is $60 per share.
At the time I made my trade yesterday, Target was selling for $60.75 per share and the October 18, $60.00 puts were going for $0.96 per share.
My “10% Trade” involved selling one of these puts… and there are only two possible ways this trade will work out.
On one hand, I’d get to generate a 10.1% annualized yield from Target without even owning the stock. On the other hand, I’d get paid to buy Target at $60.00 per share — the same price I just sold it for on August 25.
That said, I’ll be happy however this trade works out.
Let’s take a closer look at each scenario…
Scenario 1: TGT falls below $60.00 by October 18
If Target falls below $60.00 by October 18, I’ll be obligated to buy 100 shares at $60.00 per share.
That’s a little cheaper than the $60.75 price the stock was trading for when I sold the put yesterday… but more importantly, that’s the same exact price that I sold the stock for as a result of my trade that closed out on August 25.
And I’m getting paid for simply agreeing to buy the stock at that price.
You see, in exchange for my agreement, I collected an instant $96.00 (100 shares X $0.96 per share) before commissions.
This money was deposited into my Roth IRA immediately.
Taking this income into consideration – and subtracting out the commissions – my cost-basis will actually drop to $59.22 per share.
That’s a 2.5% discount to the $60.75 share price that Target was selling for at the time I made this trade. I realize that’s not much of a discount, but that’s not the point. The point is, in “Scenario 1” I’m getting paid instant cash for the opportunity to buy Target at the same price that I just sold it for. AND, it’s giving me a “backdoor” way to contribute that cash to my Roth IRA. I’ll take it!
Scenario 2: TGT stays above $60.00 by October 18
If Target stays above $60.00 by October 18, the contract expires worthless and I get to keep the $96.00 in income (before commissions).
After commissions, this works out to a 1.5% return on what my purchase obligation would have been ($0.96 / $60.00) in only 53 days.
That may not sound like a big deal, but if I can repeat this trade over the period of a year I could generate a 10.1% yield from Target without even buying shares.
As long as the market continues to offer safe, income-generating opportunities like this one, I’ll be more than happy to take them. Especially if they give me a “backdoor” way to contribute extra cash to my Roth IRA.
P.S. I realize the typical financial advisor may think it’s crazy to trade individual stocks in a retirement account… no matter how safe the stocks may appear. And in many cases they’re probably right — especially if you’re not properly diversified and you’re heavily dependent on the income from this account. So I urge you not to blindly follow my lead today without first speaking to a professional advisor or doing your own due diligence and research. In addition, I’m not a tax advisor and I don’t claim to be… so please consult a professional for any tax related questions you have.