Few people realize it, but a “10% Trade” can be both safer AND generate more income than simply buying a stock at the market price.
Consider General Electric (GE)…
While I already own shares in my long-term dividend growth portfolio — and plan on holding them for the long-haul — I’m always open to potential “10% Trade” opportunities with the stock that could both boost my income and reduce my risk.
With this in mind, I made another “10% Trade” with General Electric on Friday.
One neat thing about this trade is that I’m getting paid for simply agreeing to buy the stock at a discount to what it’s currently trading for.
Since I’m already interested in buying additional shares at their current price level, then of course I’m interested in getting paid for the opportunity to buy them for even cheaper.
Here’s how it works…
At the time I made the trade, GE was selling for $25.48 per share and the October 24, $25 puts were going for $0.26 per share.
My “10% Trade” involved selling three of these puts (that’s 300 shares)… and there are only two possible ways this trade will work out.
[hana-code-insert name=’adsense-article’ /]On one hand, I’d get to generate a 12.2% annualized yield from GE without even have to buy those additional 300 shares.On the other hand, I’d get to buy 300 shares of GE at a 2.7% discount to what they were trading for at the time I executed the trade on Friday.
Since double-digit income is a no-brainer — and since I’m interested in buying more shares of GE at today’s price anyways (let alone an additional 2.7% discount) — either scenario works for me.
Let’s take a closer look at how each would play out…
Scenario 1: GE falls below $25 by October 24
If GE falls below $25 by October 24, I’ll be obligated to buy 300 shares at $25 per share. That’s cheaper than the $25.48 price the stock was trading for when I sold the puts on Friday.
In exchange for my agreement, I was paid an instant $78.00 (300 shares X $0.26 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 drops to $24.79 per share.
That’s a 2.7% discount to the $25.48 share price that GE was selling for at the time I made this trade.
Bottom line? In “Scenario 1” I get paid instant cash while waiting to buy GE at a discount to its current price. I’ll take it!
Scenario 2: GE stays above $25 by October 24
If GE stays above $25 by October 24, the contract expires worthless. That means I won’t be required to buy the 300 shares of stock… yet I still get to keep the $78.00 in income (before commissions).
After commissions, this works out to a 0.9% return on what my purchase obligation would have been ($0.26 / $25) in just 28 days.
If I can repeat this trade over the period of a year I could generate a 12.2% yield from GE without even owning additional stock. Compare this yield to the stock’s “regular” annual dividend yield of 3.5%.
This trade is just one more example of how a “10% Trade” can be both safer AND generate more income than simply buying a stock at the market price.
I’ll continue to keep you posted as I make these trades, but please keep in mind that they’re not intended to be specific recommendations for you as an individual. 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 double… triple… or even quadruple your yield on some of the best companies in the world.
Greg Patrick
TradesOfTheDay.com
P.S. This isn’t the first time I’ve made a “10% Trade” with General Electric (GE). To see the results of my previously published trades, along with all other real-life, real-money “10% Trades” I’ve made available to the public, check out the Track Record page.
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