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.
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.
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…
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.
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%.[hana-code-insert name=’stansberry-article’ /]