Despite some impressive climbs during 2014, Coca-Cola (KO) shares have recently pulled back and are now trading just about where they started the year…
While some investors may be frustrated by this action, the stock’s ups, downs, and general sideways movements have been favorable for some well-timed “10% Trades.”
Consider just the two that I’ve made public here in Trades Of The Day…
Added up, these trades have generated a 4.9% yield in a total of just 91 days.
That may not sound like much, but it works out to a 19.7% annualized yield — in a year where the stock has ultimately gone nowhere.
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 Coke 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.
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 is that I’m getting paid for simply agreeing to sell the stock at a higher price than what I’m buying it for.
At the end of the day, this “10% Trade” should generate an 18.7% to 26.0% annualized yield, which is significantly more income than what I’m collecting from my “buy and hold” shares.
The income I’m collecting also helps reduce my cost basis, lowering my overall risk.
Here’s how it works…
Opportunity to Capture an 18.7% to 26.0% Annualized Yield from Coca-Cola
Yesterday I bought 300 shares of KO for $40.70 per share and simultaneously “sold to open” three January 17, $41 covered calls for $0.72 per share.
There are two possible ways this trade will work out — and they both spell at least double-digit annualized yields on my purchase price…
Scenario #1: Coca-Cola stays under $41 by January 17
If Coca-Cola stays under $41 by January 17 I’ll get to keep my 300 shares.
In the process I’ll also have received $216.00 in covered call income ($0.72 x 300 shares).
The covered call income — known as a “premium” in options speak — was collected instantly yesterday. It was deposited in my Roth IRA.
At the end of the day, if “Scenario 1″ plays out I’ll be looking at $205.80 in profit after commissions.
On a percentage basis, I received an instant 1.8% yield for selling the covered calls ($0.72 / $40.70).
When I subtract out the commissions I’m looking at a 1.7% yield in 33 days… which works out to an 18.7% annualized yield.
Scenario #2: Coca-Cola climbs over $41 by January 17
If Coca-Cola climbs over $41 by January 17 my 300 shares will get sold (“called away”) at $41 per share.
In “Scenario 2″ — like “Scenario 1″ — I get to keep the $216 in covered call income ($0.72 x 300 shares). I’ll also generate $90.00 in capital gains ($0.30 X 300).
In this scenario, after commissions I’ll be looking at a $287.10 profit.
From a percentage standpoint, this “10% Trade” will deliver and instant 1.8% yield for selling the covered calls ($0.72 / $40.70) and a 0.7% return from capital gains ($0.30 / $40.70).
After subtracting out the commissions, I’m looking at a 2.4% total return in just 33 days.
That works out to a 26.0% annualized yield from Coca-Cola.
As I’ve mentioned before, 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.
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