Thanks to recent market volatility, we have an interesting income opportunity today with Coca-Cola (KO):
In short, while the company’s quarterly dividends equate to a 3.3% forward annual yield at current prices — which is already a solid yield for this Dividend Champion — a select “10% Trade” could deliver over 4x that income.
As a refresher, a “10% Trade” is a conservative income-oriented trade that involves generating a 10%-plus annualized yield by selling either a covered call or a cash-secured put on 1) a high-quality 2) dividend growth stock 3) trading at a reasonable price.
At current prices, Coca-Cola seems to meet all three criteria, making it an ideal candidate for one of these trades.
Here’s how I’m personally taking advantage of this opportunity…
Opportunity to Capture a 15.0% to 26.7% Annualized Yield from Coca-Cola
On Friday I bought 300 shares of KO for $40.42 per share and simultaneously “sold to open” three August 21, $41 covered calls for $0.73 per share.
There are likely two 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 August 21
If Coca-Cola stays under $41 by August 21 I’ll get to keep my 300 shares.
In the process I’ll also have received $219.00 in covered call income ($0.73 x 300 shares).
The covered call income — known as a “premium” in options speak — was collected instantly on Friday. It was deposited in the account where I made the trade, which is my 401k retirement account.
At the end of the day, if “Scenario 1″ plays out I’ll be looking at $208.67 in profit after commissions.
On a percentage basis, I received an instant 1.8% yield for selling the covered calls ($0.73 / $40.42).
When I subtract out the commissions I’m looking at a 1.7% yield in 42 days… which works out to a 15.0% annualized yield.
Scenario #2: Coca-Cola climbs over $41 by August 21
If Coca-Cola climbs over $41 by August 21 my 300 shares will get sold (“called away”) at $41 per share.
In “Scenario 2″ — like “Scenario 1″ — I get to keep the $219 in covered call income ($0.73 x 300 shares). I’ll also generate $174.00 in capital gains ($0.58 X 300).
In this scenario, after commissions I’ll be looking at a $372.34 profit.
From a percentage standpoint, this “10% Trade” will deliver and instant 1.8% yield for selling the covered calls ($0.73 / $40.42) and a 1.4% return from capital gains ($0.58 / $40.42).
After subtracting out the commissions, I’m looking at a 3.1% total return in just 42 days.
That works out to a 26.7% annualized yield from Coca-Cola.