Opportunity to Capture a 24.5% to 28.6% Annualized Yield from Chevron
Yesterday, on its intra-day pullback below $117.00, I made a “10% Trade” with Dividend Champion Chevron (CVX).
My trade involved buying 100 shares of CVX for $116.53 per share, and simultaneously selling one October 31, $117 covered call for $2.35 per share.
Here’s what the filled order looked like in my brokerage account…
I couldn’t resist the setup.
In short, CVX has recently moved into oversold territory on the Relative Strength Index (RSI).
Looking back over the past 12 months, this is only the third time it’s been in such a state.
After the first two times, CVX went on to rise as much as 5.6% and 7.6% within a month.
Of course there’s no guarantee, but if history repeats — and CVX bounces back from its oversold levels — then shares should easily be trading above my $117.00 per share strike price come October 31 expiration.
In other words, I think there’s a fairly good chance my 100 shares will get called away.
Regardless, there are only two possible ways this trade will work out — and they both spell at least double-digit annualized yields on my purchase price…
Scenario #1: Chevron stays under $117 by October 31
If Chevron stays under $117 by October 31 I’ll get to keep my 100 shares.
In the process I’ll also have received $235 in covered call income ($2.35 x 100 shares).
The covered call income — known as a “premium” in options speak — was collected instantly yesterday. It was deposited in my brokerage account.
At the end of the day, if “Scenario 1” plays out I’ll be looking at $226.26 in profit after commissions.
On a percentage basis, I received an instant 2.0% yield for selling the covered calls ($2.35 / $116.53).
When I subtract out the commissions I’m looking at a 1.9% yield in 29 days… which works out to a 24.5% annualized yield. That’s nearly SEVEN times Chevron’s “regular” annual dividend yield of 3.6%.
[hana-code-insert name=’adsense-article’ /]Scenario #2: Chevron climbs over $117 by October 31
If Chevron climbs over $117 by October 31 my 100 shares will get sold (“called away”) at $117 per share.
In this scenario, not only will I get to keep the $235 in covered call income ($2.35 x 100 shares)… but I’ll also generate $47 in capital gains ($0.47 x 100 shares) in the process.
In this scenario, after commissions I’ll be looking at a $264.56 profit.
From a percentage standpoint, this “10% Trade” will deliver an instant 2.0% yield for selling the covered calls ($2.35 / $116.53) and a 0.4% return from capital gains ($0.47 / $116.53).
After subtracting out the commissions, I’m looking at a 2.3% total return in just 29 days.
That works out to a 28.6% annualized yield from Chevron.
Bottom Line: Either way this “10% Trade” works out offers me the opportunity to generate a 10%-plus annualized yield from a Dividend Champion like Chevron (CVX). If I get to keep my shares, collect and compound my dividend income, and “rinse and repeat” this process of selling covered calls to continue generating income/lowering my cost basis, great. Or, if I’m forced to sell Chevron for a 28.6% annualized profit, 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 from some of the best dividend growth stocks in the world.
Greg Patrick
TradesOfTheDay.com
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 boost 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.