A “10% Trade” can be a safe way to boost your income on some of the best companies in the world.
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 with Microsoft (MSFT)…
Opportunity to Capture a 12.1% to 15.6% Annualized Yield from MSFT
On Friday I bought 100 shares of MSFT for $64.44 per share and simultaneously “sold to open” one May 19, $65.00 covered call for $2.03 per share.
With this in mind, there are likely two ways this trade will work out — and they both spell at least double-digit annualized yields on my purchase price…
Please note: To be conservative, I don’t include any dividends in my calculations for either of the following scenarios. I require “10% Trades” to generate at least 10% annualized yields off of options premium and applicable capital gains alone. So any dividends collected are just “bonus” that will boost the overall annualized yields even further.
Scenario #1: MSFT stays under $65 by May 19
If MSFT stays under $65 by May 19, I’ll get to keep my 100 shares.
In the process I’ll also have received $203 in covered call income ($2.03 x 100 shares).
The covered call income — known as a “premium” in the options world — was collected instantly on Friday. 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 I’ll be looking at $194.25 in profit after commissions and fees.
On a percentage basis, I received an instant 3.0% yield for selling the covered call ($2.03 / $64.44).
When I subtract out the commissions and fees I’m looking at a 3.0% yield in 91 days, which works out to a 12.1% annualized yield.
Scenario #2: MSFT climbs over $65 by May 19
If MSFT climbs over $65 by May 19 my 100 shares will get sold (“called away”) at $65 per share.
Like “Scenario 1”, I get to keep the $203 in covered call income ($2.03 x 100 shares)… and I’ll also realize a $56 capital gain ($0.56 X 100) since I bought shares at $64.44 and will be selling at $65.
In this scenario, after commissions and fees I’ll be looking at a $250.25 profit.
From a percentage standpoint, this “10% Trade” will deliver an instant 3.0% yield for selling the covered call ($2.03 / $64.44) and a 0.9% capital gain ($0.56 / $64.44).
After subtracting out the commissions and fees, I’m looking at a 3.9% total return in 91 days.
That works out to a 15.6% annualized yield from MSFT. Not bad, considering the stock’s “regular” yield is 2.4%.
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.