Note: I had a typo in my original article. It said that I sold a November 28, $162.00 put.
However, I sold a November 28, $162.50 put. All numbers have been updated in this article to reflect the correct strike price.
International Business Machines (IBM) could be a great stock to consider for a “10% Trade” right now.
In short, it’s a high-quality company, it’s growing its dividend, it pays HUGE income by way of options premiums, and thanks to its recent sell-off, it looks dirt-cheap at today’s prices.
In fact, anyone who buys today could own shares at a significant discount to what Warren Buffett recently paid for them.
Take a look at the chart on the right.
According to Berkshire Hathaway’s most recent quarterly filing, we know that Buffett bought an additional 1.8 million shares of IBM in the second quarter of 2014.
While we don’t know exactly when he bought or what price he paid, we can see shares traded between a range of about $180 and $195 during that period.
If Buffett thought shares were a good deal at those prices, I wouldn’t be surprised if he’s piling up at today’s prices.
Right now, IBM is trading at $164.
While I think you could do well buying here and holding for the long-term, a “10% Trade” could pay us instant income for the opportunity to buy shares for even cheaper.
At the time I made the trade, IBM was selling for $164.04 per share and the November 28, $162.50 puts were going for $2.54 per share.
My “10% Trade” involved selling one of these puts (that’s 100 shares)… and there are only two possible ways this trade will work out.
On one hand, I’d get to generate a 19.7% annualized yield from IBM without even having to buy those additional 100 shares.
On the other hand, I’d get to buy 100 shares of IBM at a 2.4% discount to what they were trading for at the time I executed the trade on Friday.
Since safe, double-digit annualized income is a no-brainer — and since I’m interested in buying more shares of IBM at today’s price anyways (let alone an additional 2.4% discount) — either scenario works for me.
Let’s take a closer look at how each would play out…
Scenario 1: IBM falls below $162.50 by November 28
If IBM falls below $162.50 by November 28, I’ll be obligated to buy 100 shares at $162.50 per share. That’s cheaper than the $164.04 price the stock was trading for when I sold the put on Friday.
It gets better. In exchange for my agreement, I was paid an instant $254.00 (100 shares X $2.54 per share) before commissions. This money was deposited into my account immediately.
Taking this income into consideration – and subtracting out the commissions – my cost basis drops to $160.13 per share.
That’s a 2.4% discount to the $164.04 share price that IBM was selling for at the time I made this trade.
Bottom line? In “Scenario 1” I get paid huge, instant cash while waiting for the opportunity to buy IBM at a discount to its already dirt-cheap current price. I’ll take it!
Scenario 2: IBM stays above $162.50 by November 28
If IBM stays above $162.50 by November 28, the contract expires worthless. That means I won’t be required to buy the 100 shares of stock… yet I still get to keep the $254.00 in income (before commissions).
After commissions, this works out to a 1.5% return on what my purchase obligation would have been ($2.54 / $162.50) in just 28 days.
If I can repeat this trade over the period of a year I could generate a 19.7% yield from IBM without even owning the stock. Compare this yield to the stock’s “regular” annual dividend yield of 2.7% at current prices.
I’ll continue to keep you posted as I make these trades, but please keep in mind that they’re not intended to be specific recommendations for you as an individual. Everyone has different financial situations, risk tolerance, goals, time frames, etc.
Instead, I’m sharing these real-life, real-money “10% Trades” as examples – so you can see for yourself how it’s entirely possible to safely double… triple… or even quadruple your yield on some of the best companies in the world.
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