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 Intel (INTC)…
Opportunity to Capture a 9.9% to 21.5% Annualized Yield from INTC
Yesterday I boughtÂ 200Â shares ofÂ INTCÂ forÂ $36.02Â per share and simultaneously â€śsold to openâ€ť twoÂ May 19,Â $37.00 covered callsÂ forÂ $0.89Â 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 INTC stays under $37 by May 19
If INTC stays under $37 by May 19, I’ll get to keep my 200 shares.
In the process Iâ€™ll also have received $178 in covered call income ($0.89 x 200 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 $168.45 in profit after commissions and fees.
On a percentage basis, I received an instant 2.5% yield for selling the covered calls ($0.89 / $36.02).
When I subtract out the commissions and fees Iâ€™m looking at a 2.3% yield in 86 days, whichÂ works out to a 9.9% annualized yield.
Scenario #2:Â INTC climbsÂ over $37 by May 19
If INTC climbs over $37 by May 19 my 200 shares will get sold (â€ścalled awayâ€ť) at $37 per share.
Like “Scenario 1″, I get to keep the $178 in covered call income ($0.89 x 200 shares)… and Iâ€™ll also realize a $196 capital gain Â ($0.98 x 200)Â since I bought shares at $36.02 and will be selling at $37.
In this scenario, after commissions and fees Iâ€™ll be looking at a $364.45 profit.
From a percentage standpoint, this â€ś10% Tradeâ€ť will deliver an instant 2.5% yield for selling the covered calls ($0.89 / $36.02)Â and a 2.7% capital gain ($0.98 / $36.02).
After subtracting out the commissions and fees, Iâ€™m looking at a 5.1% total return in 86 days.
That works out to a 21.5% annualized yield from INTC. Not bad, considering the stock’s “regular” yield is 2.9%.
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.