A â€ś10% Tradeâ€ť can be a safe way to boost your income on some of the best companies in the world.
As a refresher, a â€ś10% Tradeâ€ť isÂ a conservative income-oriented trade that involves selling either a covered call or a cash-secured put on a reasonably-priced, high-quality dividend growth stock.
Here’s where it gets neat…
And when you sell aÂ covered call, you can collect income for simply agreeing toÂ sellÂ a stock you already own at aÂ higherÂ price than what you bought it for.
So this strategy can pay you instant income while helping you buy low and sell high.
If you’re working with a high-quality dividend growth stock that you think is trading at a reasonable price, you may be looking at a low-risk opportunity to generate above average income.
Consider the “10% Trade” I just made withÂ Target (TGT), aÂ Dividend ChampionÂ that’s pulled back roughly 17% over the past two months…
Opportunity to Capture a 22.9% to 25.8% Annualized Yield from Target
Yesterday I boughtÂ 100Â shares ofÂ TGTÂ forÂ $67.72Â per share and simultaneously â€śsold to openâ€ť oneÂ July 22,Â $68.00 covered callÂ forÂ $1.66Â per share.
With this in mind, there are likely two ways this trade will work out â€” and they both spell at least double-digit annualized yields on my purchase priceâ€¦
Scenario #1:Â Target stays under $68.00 by July 22
If Target stays under $68.00 by July 22, I’ll get to keep my 100 shares.
In the process Iâ€™ll also have received $166.00 in covered call income ($1.66 x 100 shares).
The covered call income â€” known as a â€śpremiumâ€ť in the options world â€” was collected instantly yesterday. It was deposited in the account where I made the trade, which is my 401(k) retirement account.
At the end of the day, if “Scenario 1″ plays out Iâ€™ll be looking at $157.25 in profit after commissions and fees.
On a percentage basis, I received an instant 2.5% yield for selling the covered call ($1.66 / $67.72).
When I subtract out the commissions and fees Iâ€™m looking at a 2.3% yield in 37 days, whichÂ works out to a 22.9% annualized yield.
Scenario #2:Â TargetÂ climbs over $68.00 by July 22
If Target climbs over $68.00 by July 22 my 100 shares will get sold (â€ścalled awayâ€ť) at $68.00 per share.
Like “Scenario 1″, I get to keep the $166 in covered call income ($1.66 x 100 shares)… but Iâ€™ll also generate $28 in capital gains ($0.28 X 100).
In this scenario, after commissions and fees Iâ€™ll be looking at a $177.06 profit.
From a percentage standpoint, this â€ś10% Tradeâ€ť will deliver an instant 2.5% yield for selling the covered call ($1.66 / $67.72)Â and a 0.4% return from capital gains ($0.28 / $67.72).
After subtracting out the commissions and fees, Iâ€™m looking at a 2.6% total return in 37 days.
That works out to a 25.8% annualized yield from Target. Not bad, considering the stock’s “regular” yield is 3.6%.
P.S. I realize the typical financial advisor may think itâ€™s crazy to trade individual stocks in a retirement accountâ€¦ no matter how safe the stocks may appear.Â And in many cases theyâ€™re probably right â€” especially if youâ€™re not properly diversified and youâ€™re heavily dependent on the income from this account.Â So IÂ 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, Iâ€™m not a tax advisor and I donâ€™t claim to beâ€¦ so please consult a professional for any tax related questions you have.