I Just Made This “10% Trade” with Wells Fargo (WFC)

[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]

While I already own Wells Fargo (WFC) in my long-term dividend growth portfolio (and plan on holding it for the long-haul), I’m always open to potential “10% Trade” opportunities with the stock that could boost my income.

With this in mind, on Friday, when the stock pulled back to both price support and its 50-day moving average — which has previously served as an important level of support — I made a move.

The trade should generate an 11.1% to 34.5% annualized yield… which is significantly more income than what I’m collecting from my “buy and hold” shares.

"10% Trade" with Wells Fargo (WFC)

Capturing an 11.1% to 34.5% Annualized Yield from Wells Fargo
On Friday I bought 200 shares of Wells Fargo (WFC) for $51.22 per share and simultaneously sold two August 16, $52.50 covered calls for $0.32 per share.

After commissions, this “10% Trade” will reduce my cost basis to $51.01 per share.

There are only two possible ways this trade will work out and they both spell at least double-digit annualized yields…

"10% Trade" with Wells Fargo (WFC)Scenario #1: Wells Fargo stays under $52.50 by August 16
If Wells Fargo stays under $52.50 by August 16 I’ll get to keep my 200 shares.

In the process I’ll also have received $64 in covered call income ($0.32 x 200 shares) and probably another $70 in dividend income ($0.35 x 200 shares).

The covered call income — known as a “premium” in options speak — was collected instantly on Friday.

I should collect the dividend income when Wells Fargo makes its next quarterly payout.

If “Scenario 1” plays out, after subtracting the commissions, I’m looking at a profit of $112.52 — or a 1.1% return in 36 days.

That may not sound like a heck of a lot, but it works out to an 11.1% annualized yield from Wells Fargo. That’s quadruple the stock’s “regular” forward annual dividend yield of 2.6%.

Or look at it another way: I’m collecting about 42% of the stock’s “regular” annual income (1.1% yield vs. 2.6% yield) in about 10% of the time (36 days vs. 365 days).

[hana-code-insert name=’adsense-article’ /]Scenario #2: Wells Fargo climbs over $52.50 by August 16
If Wells Fargo climbs over $52.50 by August 16 my 200 shares will get sold (“called away”) at $52.50 per share.

I’ll have generated $64 in covered call income ($0.32 x 200 shares), potentially $70 in dividend income ($0.35 x 200 shares) and $256 in capital gains ($52.50 – $51.22 x 200 shares).

In this scenario, after commissions I’ll be looking at a $348.53 profit.

From a percentage standpoint, after subtracting out the commissions this “10% Trade” will deliver a 3.4% total return in 36 days.

That works out to a 34.5% annualized yield from Wells Fargo.

Bottom Line: Either way this “10% Trade” works out offers me the opportunity to generate a 10%-plus annualized yield from Wells Fargo (WFC) — a high-quality, dividend growth stock that appears undervalued at current prices. On one hand, if I get to keep my shares, compound my income, and “rinse and repeat” this process to continue lowering my cost basis, great. Or, if I’m forced to sell Wells Fargo for a 34.5% annualized return, no problem. This is why I’m such a fan of “10% Trades”… and why I’ll continue to take advantage of them to boost my income.

Greg Patrick

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