Yesterday, October 30, I bought 100 shares of Kimberly-Clark (KMB) for $112.04 per share and simultaneously “sold to open” one December 15, 2017, $115 call option for $1.38 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 $1.38 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 Kimberly-Clark shares climb to $120, for example, I’ll still be forced to sell at “just” $115)… … 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: KMB stays under $115 by December 15
If KMB stays under $115 by December 15, I’ll get to keep my 100 shares.
In the process I’ll also have received $138 in call income ($1.38 x 100 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 $132.35 in profit after commissions and fees.
On a percentage basis, I received a 1.2% yield for selling the call ($1.38 / $112.04).
When I subtract out the commissions and fees I’m looking at a 1.2% yield in 46 days, which works out to a 9.4% annualized yield.
Scenario #2: KMB climbs over $115 by December 15
If KMB climbs over $115 by December 15, my 100 shares will get sold (“called away”) at $115 per share.
Like “Scenario 1”, I get to keep the $138 in call income ($1.38 x 100 shares). I’ll also generate a $296 capital gain ($2.96 x 100) since I bought at $112.04 and will be selling at $115.
In this scenario, after commissions and fees I’ll be looking at a $423.40 profit.
From a percentage standpoint, this high-yield trade will deliver an instant 1.2% yield for selling the call ($1.38 / $112.04) and a 2.6% gain ($2.96 / $112.04).
After subtracting out the commissions and fees, I’m looking at a 3.8% total return in 46 days.
That works out to a 30.0% annualized yield from Kimberly-Clark. Not bad, considering the stock’s “regular” yield is 3.4%.
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.