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 with CVS Health (CVS)…
Opportunity to Capture a 15.5% to 17.2% Annualized Yield from CVS
Yesterday I boughtÂ 100Â shares ofÂ CVSÂ forÂ $79.79Â per share and simultaneously â€śsold to openâ€ť oneÂ April 21,Â $80.00 covered callÂ forÂ $2.09Â 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 CVS stays under $80 by April 21
If CVS stays under $80 by April 21, I’ll get to keep my 100 shares.
In the process Iâ€™ll also have received $209 in covered call income ($2.09 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 $200.25 in profit after commissions and fees.
On a percentage basis, I received an instant 2.6% yield for selling the covered call ($2.09 / $79.79).
When I subtract out the commissions and fees Iâ€™m looking at a 2.5% yield in 59 days, whichÂ works out to a 15.5% annualized yield.
Scenario #2:Â CVS climbsÂ over $80 by April 21
If CVS climbs over $80 by April 21 my 100 shares will get sold (â€ścalled awayâ€ť) at $80 per share.
Like “Scenario 1″, I get to keep the $209 in covered call income ($2.09 x 100 shares)… and Iâ€™ll also realize a $21 capital gain Â ($0.21 x 100)Â since I bought shares at $79.79 and will be selling at $80.
In this scenario, after commissions and fees Iâ€™ll be looking at a $221.25 profit.
From a percentage standpoint, this â€ś10% Tradeâ€ť will deliver an instant 2.6% yield for selling the covered call ($2.09 / $79.79)Â and a 0.3% capital gain ($0.21 / $79.79).
After subtracting out the commissions and fees, Iâ€™m looking at a 2.8% total return in 59 days.
That works out to a 17.2% annualized yield from CVS. Not bad, considering the stock’s “regular” yield is 2.5%.
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.