As a refresher, a “10% Trade” is a conservative income-oriented trade that involves selling either a covered call or a cash-secured put on a reasonably-priced, high-quality dividend growth stock.
These trades typically last just six to 10 weeks — and not only are they a relatively safe way to potentially double… triple… or even quadruple your annualized yield, but they can be a great way to buy an already cheap stock for even cheaper.
Consider the “10% Trade” I made with Dividend Contender IBM (IBM) yesterday…
At the time I made my trade, IBM was selling for $184.94 per share and the July 19, $180.00 puts were going for $2.33 per share.
My “10% Trade” involved selling one of these puts… and there are only two possible ways this trade will work out.
On one hand, I’d get to generate an 11.6% annualized yield from IBM without even owning the stock.
That’s more than quadruple the stock’s “regular” dividend yield of 2.4%.
On the other hand, I’d get paid $233.00 to buy IBM — an already dirt-cheap stock — for even cheaper than what it was selling for yesterday.
That said, I’ll be happy however this trade works out.
Let’s take a closer look at each scenario…
Scenario 1: IBM falls below $180.00 by July 19
If IBM falls below $180.00 by July 19, I’ll be obligated to buy 100 shares at $180.00 per share.
This money was deposited into my account immediately.
Taking this income into consideration – and subtracting out the commissions – my cost-basis will drop to $177.87 per share.
That’s a 3.8% discount to the $184.94 share price that IBM was selling for at the time I made this trade.
Considering how the stock already looks dirt-cheap at current levels, the opportunity to pick up shares at an additional discount is particularly appealing to me.
Scenario 2: IBM stays above $180.00 by July 19
If IBM stays above $180.00 by July 19, the contract expires worthless and I get to keep the $233.00 in income (before commissions).
After commissions, this works out to a 1.2% return on what my purchase obligation would have been ($2.33 / $180.00) in 39 days.
If I can repeat these results over the period of a year I could generate a 11.6% yield from IBM without even buying shares. That’s the power of a “10% Trade.”
P.S. The reason I’ve gone public with many of my real-life, real-money “10% Trades” is so you can see for yourself how entirely possible it is to double… triple… or even quadruple your annualized yield on high-quality dividend growth stocks. Just keep in mind that these trades aren’t intended to be specific recommendations for you as an individual. Everyone has different financial situations, risk tolerance, goals, time frames, etc.[hana-code-insert name=’investorplace-article’ /]