As a refresher, a â€ś10% Tradeâ€ť isÂ a conservative income-oriented trade that involves selling either a covered call or a cash-secured put on a reasonably-priced, high-quality dividend growth stock.
These trades typically last just six to 10 weeks and they’re designed to generate at least 10% annualized yields.
Consider the “10% Trade” I made with Wells Fargo (WFC) yesterday…
Capturing a 10.7% to 22.4% Annualized Yield from Wells Fargo
Yesterday I sold twoÂ November 22, $52.50 covered callsÂ forÂ $0.79Â per share. I sold these calls on the shares I bought back on July 11 through another “10% Trade.” You can review the details of that original trade here and the results here.
There are only two possible ways this new trade will work outâ€¦ and they both spell at least double-digit annualized yields on my $51.22 purchase price — the price I paid back in July.
Scenario #1:Â Wells Fargo stays under $52.50 by November 22
If Wells Fargo stays under $52.50 by November 22 Iâ€™ll get to keep my 200 shares.
In the process Iâ€™ll also have received $158 in covered call income ($0.79 x 200 shares)… and likelyÂ another $70 in dividend income ($0.35 x 200 shares).
The covered call income â€” known as a â€śpremiumâ€ť in options speak â€” was collected instantly yesterday. It was deposited in my brokerage account.
The dividend income should be collected when Wells Fargo pays its next dividend.
At the end of the day, if â€śScenario 1â€ł plays out Iâ€™ll be looking at $216.51 in profit after commissions.
On a percentage basis, I received an instant 1.5% yield for selling the covered calls ($0.79 / $51.22) and should collect another 0.7% yield from the upcoming quarterly dividend payment ($0.35 / $51.22).
When I subtract out the commissions Iâ€™m looking at a 2.1% yield in 72 daysâ€¦ whichÂ works out to a 10.7%Â annualized yield. That’s almost quadruple Wells Fargo’s “regular” annual dividend yield of 2.7%.
Scenario #2:Â Wells Fargo climbs over $52.50 by November 22
If Wells Fargo climbs over $52.50 by November 22 my 200 shares will get sold (â€ścalled awayâ€ť) at $52.50 per share.
In this scenario, not only will I get to keep the $158 in covered call income ($0.79 x 200 shares)Â and theÂ $70 in quarterly dividends ($0.35 x 200 shares)â€¦ but Iâ€™ll also generate $256 in capital gains ($1.28 x 200 shares) in the process.
In this scenario, after commissions Iâ€™ll be looking at a $452.52 profit.
From a percentage standpoint, this â€ś10% Tradeâ€ť will deliver an instant 1.5% yield for selling the covered calls ($0.79 / $51.22)â€¦ a 0.7% yield from the upcoming dividend ($0.35 / $51.22)â€¦ and a 2.5% return from capital gains ($1.28 / $51.22).
After subtracting out the commissions, Iâ€™m looking at aÂ 4.4% total return in 72 days.
That works out to a 22.4%Â annualized yield from Wells Fargo.
Bottom Line:Â Either way this â€ś10% Tradeâ€ť works out offers me the opportunity to nearly quadrupleÂ my annualized yield fromÂ Wells Fargo (WFC).
This is just one more example of how a “10% Trade” can help boost your income.
P.S.Â The reason I’ve gone public with many of myÂ real-life, real-money “10% Trades”Â isÂ so you can see for yourself how entirely possible it is to boost your annualized yield on high-quality dividend growth stocks.Â Just keep in mind that these trades aren’t intended to be specific recommendations for you as an individual. Everyone has different financial situations, risk tolerance, goals, time frames, etc.