History says now could be a good time to buy shares of Chevron (CVX)…
While the company’s quarterly dividends equate to a 4.7% forward annual yield at current prices — which is already a monster yield for a Dividend Champion – a select “10% Trade” could handily deliver double-digit annualized 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, Chevron 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 69.8% to 88.2% Annualized Yield from Chevron
On Friday I bought 100 shares of CVX for $90.60 per share and simultaneously “sold to open” one July 31, $91.00 covered call for $1.30 per share. Please be aware that Chevron is scheduled to report earnings at 11am on July 31, so shares should experience some volatility on that day (which is the expiration day of this trade).
Nevertheless, 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: Chevron stays under $91 by July 31
If Chevron stays under $91 by July 31 I’ll get to keep my 100 shares.
In the process I’ll also have received $130.00 in covered call income ($1.30 x 100 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 $121.25 in profit after commissions and fees.
On a percentage basis, I received an instant 1.4% yield for selling the covered call ($1.30 / $90.60).
When I subtract out the commissions I’m looking at a 1.3% yield in seven days… which works out to a 69.8% annualized yield.
Scenario #2: Chevron climbs over $91 by July 31
If Chevron climbs over $91 by July 31 my 100 shares will get sold (“called away”) at $91 per share.
In “Scenario 2″ — like “Scenario 1″ — I get to keep the $130 in covered call income ($1.30 x 100 shares). I’ll also generate $40.00 in capital gains ($0.40 X 100).
In this scenario, after commissions I’ll be looking at a $153.06 profit.
From a percentage standpoint, this “10% Trade” will deliver and instant 1.4% yield for selling the covered call ($1.30 / $90.60) and a 0.4% return from capital gains ($0.40 / $90.60).
After subtracting out the commissions, I’m looking at a 1.7% total return in just seven days.
That works out to a 88.2% annualized yield from Chevron.
Like this setup? Here’s how I made the trade…
I placed a “Buy-Write” options order with a Net Debit price of $89.30 ($90.60 – $1.30). Here’s how the order looked in Fidelity: