A â€ś10% Tradeâ€ť 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 withÂ Microsoft (MSFT)…
Opportunity to Capture a 12.1% to 15.6% Annualized Yield from MSFT
On Friday I boughtÂ 100Â shares ofÂ MSFTÂ forÂ $64.44Â per share and simultaneously â€śsold to openâ€ť oneÂ May 19,Â $65.00 covered callÂ forÂ $2.03Â 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 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:Â 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 Iâ€™ll also have received $203 in covered call income ($2.03 x 100 shares).
The covered call income â€” known as a â€śpremiumâ€ť in the options world â€” 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 Iâ€™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 Iâ€™m looking at a 3.0% yield in 91 days, whichÂ works out to a 12.1% annualized yield.
Scenario #2:Â MSFTÂ climbsÂ over $65 by May 19
If MSFT climbs over $65 by May 19 my 100 shares will get sold (â€ścalled awayâ€ť) at $65 per share.
Like “Scenario 1″, I get to keep the $203 in covered call income ($2.03 x 100 shares)… and Iâ€™ll also realize a $56 capital gain Â ($0.56 X 100)Â since I bought shares at $64.44 and will be selling at $65.
In this scenario, after commissions and fees Iâ€™ll be looking at a $250.25 profit.
From a percentage standpoint, this â€ś10% Tradeâ€ť will deliver an instant 3.0% yield for selling the covered call ($2.03 / $64.44)Â and a 0.9% capital gain ($0.56 / $64.44).
After subtracting out the commissions and fees, Iâ€™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 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.