Yesterday, October 16, I bought 200 shares of General Mills (GIS) for $51.67 per share and simultaneously “sold to open” two November 17, 2017, $52.50 call options for $0.77 per share.
This is my latest “high-yield trade” — a strategy designed to generate above average income from some of the best companies in the world.
In exchange for that opportunity, the buyer of the option paid me $0.77 per share (the “premium”).
Because I collected immediate income when the trade opened, I’m lowering my cost basis on the shares I’m buying.
This is precisely what makes a “high-yield trade” safer than simply purchasing shares of the underlying stock the “traditional” way.
Yes, I’m limiting my potential upside (if General Mills shares climb to $55, for example, I’ll still be forced to sell at “just” $52.50)… … but that would still generate a capital gain for me… AND I’m generating immediate income in the process.
It’s a trade-off… and one I’m willing to make because this strategy, by its very nature (selling a call option instead of buying one), is designed to be conservative and to generate income. For this reason, it’s been called “the greatest income-producing tool for retirees.”
With all of this in mind, there are likely two ways this trade will work out — and they both spell high 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. Any dividends collected are just “bonus” that will boost the overall annualized yields even further.
Scenario #1: General Mills (GIS) stays under $52.50 by November 17
If GIS stays under $52.50 by November 17, I’ll get to keep my 200 shares.
In the process I’ll also have received $154 in call income ($0.77 x 200 shares).
The call income, or premium, 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 I’ll be looking at $147.66 in profit after commissions and fees.
On a percentage basis, I received a 1.5% yield for selling the calls ($0.77 / $51.67).
When I subtract out the commissions and fees I’m looking at a 1.4% yield in 32 days, which works out to a 16.3% annualized yield.
Scenario #2: General Mills (GIS) climbs over $52.50 by November 17
If GIS climbs over $52.50 by November 17, my 200 shares will get sold (“called away”) at $52.50 per share.
Like “Scenario 1”, I get to keep the $154 in call income ($0.77 x 200 shares). I’ll also generate a $166 capital gain ($0.83 x 200) since I bought at $51.67 and will be selling at $52.50.
In this scenario, after commissions and fees I’ll be looking at a $308.71 profit.
From a percentage standpoint, this high-yield trade will deliver an instant 1.5% yield for selling the call ($0.77 / $51.67) and a 1.6% gain ($0.83 / $51.67).
After subtracting out the commissions and fees, I’m looking at a 3.0% total return in 32 days.
That works out to a 34.1% annualized yield from General Mills. Not bad, considering the stock’s “regular” yield is 3.8%.
P.S. I only made this trade because: 1) I want to own the underlying stock anyways 2) I believe it was trading at a reasonable price when I made the trade 3) I am comfortable owning it for the long-haul in case the price drops significantly below my cost basis by expiration and 4) I am comfortable letting it go if shares get called away. To be mindful of position sizing, except in rare cases, the value of this trade wouldn’t exceed 5% of my total portfolio value. In addition, to minimize taxes and tax paperwork, I made this trade in a retirement account.