Yesterday, December 4, I bought 100 shares of Amgen (AMGN) for $179.57 per share and simultaneously “sold to open” one June 15, 2018 $180 call option for $11.07 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 $11.07 per share (the “premium”).
Because I collected immediate income when the trade opened, I immediately lowered my cost basis from $179.57 per share to $168.50 per share ($179.57- $11.02). 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 AMGN shares climb to $200, for example, I’ll still be forced to sell at “just” $180)… … 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: AMGN stays under $180 by June 15, 2018
If AMGN stays under $180 by June 15, I’ll get to keep my 100 shares.
In the process I’ll also have received $1,107 in call income ($11.07 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 $1,101.35 in profit after commissions and fees.
On a percentage basis, I received a 6.2% yield for selling the call ($11.07 / $179.57).
When I subtract out the commissions and fees I’m looking at a 6.1% yield in 193 days, which works out to an 11.6% annualized yield.
Scenario #2: AMGN climbs over $180 by June 15, 2018
If AMGN climbs over $180 by June 15, my 100 shares will get sold (“called away”) at $180 per share.
Like “Scenario 1”, I get to keep the $1,107 in call income ($11.07 x 100 shares). I’ll also generate a $43 capital gain ($0.43 x 100) since I bought at $179.57 and will be selling at $180.
In this scenario, after commissions and fees I’ll be looking at an $1,139.40 profit.
From a percentage standpoint, this high-yield trade will deliver an instant 6.2% yield for selling the call ($11.07 / $179.57) and a 0.2% gain ($0.43 / $179.57).
After subtracting out the commissions and fees, I’m looking at a 6.3% total return in 193 days.
That works out to a 12.0% annualized yield from AMGN. Not bad, considering the stock’s “regular” yield is 2.6%.
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.