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 Exxon Mobil (XOM)…
Opportunity to Capture an 11.3% to 19.1% Annualized Yield from XOM
On Friday I boughtÂ 100Â shares of XOMÂ forÂ $81.53Â per share and simultaneously â€śsold to openâ€ť oneÂ April 21,Â $82.50 covered callÂ forÂ $1.50Â 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: XOM stays under $82.50 by April 21
If XOM stays under $82.50 by April 21, I’ll get to keep my 100 shares.
In the process Iâ€™ll also have received $150 in covered call income ($1.50 x 100 shares).
The covered call income â€” known as a â€śpremiumâ€ť in the options world â€” was collected instantly 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 $141.25 in profit after commissions and fees.
On a percentage basis, I received a 1.8% yield for selling the covered call ($1.50 / $81.53).
When I subtract out the commissions and fees Iâ€™m looking at a 1.7% yield in 56 days, whichÂ works out to an 11.3% annualized yield.
Scenario #2:Â XOM climbsÂ over $82.50 by April 21
If XOM climbs over $82.50 by April 21 my 100 shares will get sold (â€ścalled awayâ€ť) at $82.50 per share.
Like “Scenario 1″, I get to keep the $150 in covered call income ($1.50 x 100 shares)… and Iâ€™ll also realize a $97 capital gain Â ($0.97 x 100)Â since I bought shares at $81.53 and will be selling at $82.50.
In this scenario, after commissions and fees Iâ€™ll be looking at a $238.25 profit.
From a percentage standpoint, this â€ś10% Tradeâ€ť will deliver an instant 1.8% yield for selling the covered calls ($1.50 / $81.53)Â and a 1.2% capital gain ($0.97 / $81.53).
After subtracting out the commissions and fees, Iâ€™m looking at a 2.9% total return in 56 days.
That works out to a 19.1% annualized yield from XOM. Not bad, considering the stock’s “regular” yield is 3.7%.
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.