I Just Made This “10% Trade” with Teva Pharmaceuticals (TEVA)

[stextbox id=”info”]Please keep in mind that these “10% Trade” alerts are for information purposes only. We’re not registered financial advisors and these aren’t specific trade recommendations for you as an individual. Each of our readers have different financial situations, risk tolerance, goals, time frames, etc. The ideas we publish are simply ideas that we feel fit our specific needs and that we’re personally making in our own portfolios. You should also be aware that some of the trade details (specifically stock prices and options premiums) are certain to change from the time we make our trade to the time you’re alerted about it. So please don’t attempt to make this “10% Trade” yourself without first doing your own due diligence and research.[/stextbox]

At under $50 per share, Teva Pharmaceuticals (TEVA) — which was already dirt-cheap at $53 per share last month — is an even better bargain today.

But rather than buying this “Dividend Contender” outright at the market price, you may want to consider making a “10% Trade” instead.

In short, you’d have the opportunity to 1) capture a double-digit annualized yield or 2) pick up a high quality dividend growth stock at an even larger discount than what it’s already trading for.

Both of these scenarios are attractive to me, which is why I jumped on a “10% Trade” with TEVA on Friday.

"10% Trade" with Teva Pharmaceuticals (TEVA)At the time I made my trade, TEVA was selling for $49.60 per share and the June 21, $46.00 puts were going for $0.82 per share.

My “10% Trade” involved selling two of these puts… and there are only two possible ways this trade will work out.

On one hand, I’d get to generate a 12.2% annualized yield from TEVA without even owning the stock.

On the other hand, I’d get to buy a solid dividend grower with huge potential upside at an additional 8.6% discount.

Here’s the math behind each scenario…

Scenario 1: TEVA falls below $46.00 by June 21
If TEVA falls below $46.00 by June 21, I’ll be obligated to buy 200 shares at $46.00 per share. That’s significantly cheaper than what the stock was trading for when I sold the puts on Friday.

[hana-code-insert name=’adsense-article’ /]In exchange for my agreement, I was paid an instant $164.00 (200 shares X $0.82 per share) before commissions.

This money was deposited into my account immediately.

Taking this income into consideration – and subtracting out the commissions – my cost-basis will drop to $45.33 per share.

That represents an 8.6% discount to the $49.60 share price that TEVA was selling for at the time I made this trade.

So in “Scenario 1” I’m getting paid instant cash while I wait to buy TEVA — an already dirt-cheap stock — at an even bigger discount.

Scenario 2: TEVA stays above $46.00 by June 21
If TEVA stays above $46.00 by June 21, the contract expires worthless and I get to keep the $164.00 in income (before commissions).

After commissions, this works out to a 1.7% return on what my purchase obligation would have been ($0.82 / $46) in just over seven weeks.

If I can repeat this trade over the period of a year I could generate a 12.2% yield from TEVA without even buying shares.

But this “10% Trade” isn’t without risk…

While TEVA’s fundamentals certainly look compelling, its technicals warrant caution. In short, the stock could be completing the right shoulder of a potential head & shoulders reversal pattern.

If the pattern plays out, TEVA’s measured fall could reach $44 per share. And it could happen before my trade closes on June 21, obligating me to buy a $44 stock for $46. Take a look…

TEVA Potential Risk

Considering the technical situation, this is probably the most aggressive “10% Trade” I’ve made yet.

I’ll continue to keep you posted as I make these trades, but please keep in mind that they aren’t intended to be specific recommendations. Everyone has different financial situations, risk tolerance, goals, time frames, etc.

Greg Patrick

P.S. To help keep track of the performance of my “10% Trades”, we’ve added a special Track Record section to the main menu bar on TradesOfTheDay.com. Check it out. As you’ll see, I closed out four “10% Trades” in April. All four were winners and generated annualized yields of 16.6% to 43.8%.

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