I Just Made This “10% Trade” with Mattel (MAT)

[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]

If you’re interested in both boosting your income AND reducing your risk at the same time, you really need to consider making a “10% Trade.”

Here’s what I mean…

Compare the results of the following two Mattel (MAT) trades. The first is a theoretical Buy and Hold scenario. The second is a real-life, real-money “10% Trade” I recently made.

Trade #1: Buy and Hold (theoretical trade)
On May 19, MAT was selling for $38.96 per share. If I had bought the stock at the market price, like what most investors do, I would have since collected $0.38 per share in dividend income. Excluding any commissions, that dividend income would have reduced my cost basis to $38.58 per share. The problem is, MAT has sold off since then and is currently trading around $35.69 per share. Even counting the dividend, I’d be sitting on an unrealized loss of about 7.5%.

Now consider the trade I actually made…

Trade #2: “10% Trade” (real-life trade)
On May 19, I made a “10% Trade” with MAT. At the time I entered this trade, the stock was selling for $38.96 per share. But instead of buying the stock outright, I sold a cash-secured put (actually, three of them). What this means is that I agreed to buy the stock at a pre-determined price on a pre-determined date in the future. In this case, I agreed to buy 300 shares of MAT for $37.00 per share on July 19. If the stock was trading below $37.00 per share on July 19, I would be obligated to buy 300 shares at $37.00 per share. In exchange for my purchase agreement, I was paid $0.65 per share. As it turns out, MAT was indeed trading below $37.00 per share on July 19 so the contract was executed and I was “put” (or assigned) shares at the contract price of $37.00 per share.

At the end of the day, this “10% Trade” allowed me to collect $195 in instant income ($0.65 per share X 300 shares) while waiting to buy MAT at about a 5% discount to what it was selling for at the time I made the trade ($37.00 per share vs. $38.96 per share). Excluding any commissions, the income I collected ended up reducing my cost basis to $36.35 per share.

Again, MAT is currently trading around $35.69 per share today. But thanks to the “10% Trade” I made, my unrealized loss is now just 1.8%. Compare that to the Buy and Hold investor who would be down 7.5%.

But it gets better…

From here, I can simply sell covered calls on my shares to boost my income and reduce my risk even further.

In fact, that’s exactly what I did with the “10% Trade” I made yesterday with the very same 300 shares of MAT that I was assigned on July 19.

[hana-code-insert name=’adsense-article’ /]Yesterday’s “10% Trade”  involved selling three October 18, $37.00 covered calls for $0.55 per share.

Excluding the commissions, the $165 in covered call income I collected immediately yesterday ($0.55 per share X 300 shares), coupled with the $114 in upcoming dividend income ($0.38 per share X 300 shares), will have reduced my cost basis to $35.42 per share.

With MAT trading around $35.69 today — and assuming the stock doesn’t go lower from here (see chart below) — that’s enough income to move my position back into the black.

So while the average Buy and Hold investor would be sitting on a 7.5% loss today, the “10% Trader” could be breaking even.

As you can see, not only can a “10% Trade” help boost your income, but it can also help reduce your risk by lowering your cost basis.

I’ll continue to keep you posted as I make these trades. Just 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

"10% Trade" with Mattel (MAT)