Yesterday, November 28, I bought 100 shares of Gilead Sciences (GILD) for $72.18 per share and simultaneously “sold to open” one September 21, 2018, $72.50 call option for $6.18 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 $6.18 per share (the “premium”).
Because I collected immediate income when the trade opened, I immediately lowered my cost basis from $72.18 per share to $66 per share ($72.18 – $6.18). In other words, I bought the stock at an 8.6% discount to its current price.
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 GILD shares climb to $80, for example, I’ll still be forced to sell at “just” $72.50)… … but that would still generate a small 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: GILD stays under $72.50 by September 21, 2018
If GILD stays under $72.50 by September 21, I’ll get to keep my 100 shares.
In the process I’ll also have received $618 in call income ($6.18 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 $612.34 in profit after commissions and fees.
On a percentage basis, I received an 8.6% yield for selling the call ($6.18 / $72.18).
When I subtract out the commissions and fees I’m looking at an 8.5% yield in 298 days, which works out to a 10.4% annualized yield.
Scenario #2: GILD climbs over $72.50 by September 21, 2018
If GILD climbs over $72.50 by September 21, my 100 shares will get sold (“called away”) at $72.50 per share.
Like “Scenario 1”, I get to keep the $618 in call income ($6.18 x 100 shares). I’ll also generate a $32 capital gain ($0.32 x 100) since I bought at $72.18 and will be selling at $72.50.
In this scenario, after commissions and fees I’ll be looking at a $639.39 profit.
From a percentage standpoint, this high-yield trade will deliver an instant 8.6% yield for selling the call ($6.18 / $72.18) and a 0.4% gain ($0.32 / $72.18).
After subtracting out the commissions and fees, I’m looking at an 8.9% total return in 298 days.
That works out to a 10.9% annualized yield from GILD. Not bad, considering the stock’s “regular” yield is 2.9%.
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.