Yesterday, I sold one October 16, $100 covered call on McDonald’s (MCD) for $2.12 per share. I sold this call on the 100 shares of MCD that I purchased at $99.96 per share through a 10% Trade I made last July.
There are two likely ways this trade will work out… and they both offer the potential to generate at least 10% annualized income on my original purchase price.
Scenario #1: McDonald’s stays under $100.00 by October 16
If McDonald’s stays under $100.00 by October 16, I’ll get to keep my 100 shares.
In the process I’ll also have received $212 in covered call income ($2.12 x 100 shares), before commissions and fees, and another $85 in dividend income ($0.85 x 100 shares).
The covered call income — known as a “premium” in the options world — was collected instantly yesterday. It was deposited in my retirement account.
I’m in line to collect the dividend income on September 16.
At the end of the day, if “Scenario 1″ plays out I’ll be looking at $288.30 in profit after commissions and fees.
On a percentage basis, I received an instant 2.1% yield for selling the covered call ($2.12 / $99.96), and I’m set to capture a 0.9% yield from the upcoming dividend ($0.85 / $99.96).
When I subtract out the commissions and fees, I’m looking at a 2.9% yield in 73 days… which works out to a 14.4% annualized yield.
Here’s another way to look at this opportunity: “Buy and hold” investors would have to wait 12 months to collect a 2.5% yield if they were to rely on the stock’s dividends alone for income. But this “10% Trade” delivers 16% more income (2.9% vs. 2.5%) in a fraction of the time.
If McDonald’s climbs over $100.00 by October 16, my 100 shares will get sold (“called away”) at $100.00 per share.
In this scenario, I will have collected the $212 in covered call income ($2.12 x 100 shares) and $4 in capital gains (($100.00 – $99.96) x 100 shares). Remember, I bought the stock at $99.96 per share and I’d be selling it at $100.00 per share.
In addition, depending on the date shares get called away (the stock goes ex-dividend on August 28), I may still collect the $85 in dividend income ($0.85 x 100 shares).
If so, in this scenario, after commissions I’ll be looking at a profit of $284.11.
From a percentage standpoint, this “10% Trade” will deliver an instant 2.0% yield for selling the covered call ($3.34 / $130.00) and a potential 0.9% yield from the upcoming dividend ($0.85 / $99.96).
After subtracting out the commissions and fees, I’m looking at a 2.8% total return in 73 days, which works out to a 14.2% annualized yield from McDonald’s. That’s the power of a “10% Trade.”
P.S. If you don’t already own McDonald’s (MCD), I wouldn’t make a new “10% Trade” with it here. In short, I think there are better opportunities available right now. In fact, I plan on making a brand new trade in the coming days. I’ll keep you posted if and when I do.
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