A “10% Trade” can be a safe way to boost your income on some of the best companies in the world.
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.
Here’s where it gets neat…
[hana-code-insert name=’adsense-article’ /]When you sell a cash-secured put, you can collect income for simply agreeing to buy a stock you like at a discount to what it’s currently trading for.And when you sell a covered call, you can collect income for simply agreeing to sell a stock you already own at a higher price than what you bought it for.
So this strategy can pay you instant income while helping you buy low and sell high.
If you’re working with a high-quality dividend growth stock that’s already trading at a reasonable price, it really doesn’t get much safer than this.
Take Wal-Mart (WMT)…
Over the past few months I’ve made three “10% Trades” with this Dividend Champion that have generated hundreds of dollars in safe, instant income.
And I’ve done so by simply agreeing to buy the stock for less than what it was selling for at the time I made my trade, and for simply agreeing to sell my Wal-Mart shares for higher than what I had paid for them.
You can review the details of my first two “10% Trades” with Wal-Mart here and here… and you can review the results of both trades here.
I made my third “10% Trade” with Wal-Mart yesterday.
The neat thing about this trade, much like my second trade, is that I’m getting paid for simply agreeing to buy the stock for the same price that I recently sold it for.
I’ll explain…
At the time I made my trade yesterday, Wal-Mart was selling for $75.73 per share and the August 16, $75.00 puts were going for $1.21 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 10.6% annualized yield from Wal-Mart without even owning the stock. On the other hand, I’d get paid to buy Wal-Mart at $75.00 per share — the same price I recently sold it for.
That said, I’ll be happy however this trade works out.
Let’s take a closer look at each scenario…
Scenario 1: WMT falls below $75.00 by August 16
If Wal-Mart falls below $75.00 by August 16, I’ll be obligated to buy 200 shares at $75.00 per share.
That’s cheaper than the $75.73 price the stock was trading for when I sold the puts yesterday… but more importantly, that’s the same exact price that I sold the stock for as a result of my first “10% Trade” with Wal-Mart.
And I’m getting paid for simply agreeing to buy the stock at that price.
You see, in exchange for my agreement, I collected an instant $242.00 (200 shares X $1.21 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 actually drop to $73.95 per share.
That’s a 2.4% discount to the $75.73 share price that Wal-Mart was selling for at the time I made this trade. I realize that’s not much of a discount, but that’s not the point. The point is, in “Scenario 1” I’m getting paid instant cash for the opportunity to buy Wal-Mart at the same price that I recently sold it for. I’ll take it!
Scenario 2: WMT stays above $75.00 by August 16
If Wal-Mart stays above $75.00 by August 16, the contract expires worthless and I get to keep the $242.00 in income (before commissions).
After commissions, this works out to a 1.5% return on what my purchase obligation would have been ($1.21 / $75.00) in only 53 days.
That may not sound like a big deal, but if I can repeat this trade over the period of a year I could generate a 10.6% yield from Wal-Mart without even buying shares.
As I mentioned yesterday, as long as the market continues to offer safe, income-generating opportunities like this one, I’ll be more than happy to take them.
Greg Patrick
TradesOfTheDay.com
P.S. I’ll continue to keep you posted as I make these trades, but please keep in mind that these aren’t intended to be specific recommendations. Everyone has different financial situations, risk tolerance, goals, time frames, etc.
Instead, I’m sharing these real-life, real-money “10% Trades” as examples — so you can see for yourself how it’s entirely possible to safely boost your income from some of the best companies in the world.