Target (TGT) shares have gone up and down throughout 2014, but they’ve ultimately gone nowhere…
While some investors may be frustrated by this action, these ups and downs — and general sideways movements — have been favorable for some well-timed “10% Trades.”
Consider just the three that we’ve made public here in Trades Of The Day…
Added up, our “10% Trades” with Target have generated a 5.7% yield in a total of just 141 days.
That may not sound like much, but it works out to a 14.8% annualized yield — in a year where the stock has ultimately gone nowhere.
In other words, these trades are doing exactly what they’re supposed to: generate safe, 10%-plus annualized yields. Take a look…
While I already own Target 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 continue to both boost my income and reduce my risk.
With this in mind, I made another “10% Trade” with Target yesterday.
[hana-code-insert name=’adsense-article’ /]One neat thing about this trade is that since I made it my Roth IRA, it essentially served as a legal “backdoor” way to contribute extra money to that account even though I’m no longer eligible to. I’ve explained how this works before.Another neat thing is that I’m getting paid for simply agreeing to sell the stock for a higher price than what I was paid to buy it for.
The trade should generate a 25.3% to 61.3% annualized yield, which is significantly more income than what I’m collecting from my “buy and hold” shares.
The income I’m collecting also helps reduce my cost basis, lowering my overall risk.
Here’s how it works…
Capturing a 25.3% to 61.3% Annualized Yield from Target
Yesterday I sold one November 22, $62.50 covered call for $0.90 per share. I sold this call on the shares I was “put” from my “10% Trade” that closed out on October 18.
There are only two possible ways this trade will work out… and they both spell at least double-digit annualized yields on my $60 purchase price — the price I just bought the stock for.
Scenario #1: Target stays under $62.50 by November 22
If Target stays under $62.50 by November 22 I’ll get to keep my 100 shares.
In the process I’ll also have received $90 in covered call income ($0.90 x 100 shares)… and likely $52 in dividend income ($0.52 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 $133.21 in profit after commissions.
On a percentage basis, I received an instant 1.5% yield for selling the covered calls ($0.90 / $60.00) and should receive a 0.9% yield from dividends ($0.52 / $60.00).
When I subtract out the commissions I’m looking at a 2.2% yield in 32 days… which works out to a 25.3% annualized yield.
Scenario #2: Target climbs over $62.50 by November 22
If Target climbs over $62.50 by November 22 my 100 shares will get sold (“called away”) at $62.50 per share. That’s fine with me because that’s more than what I just bought the stock for.
Keep this in mind: I was paid $88.01 to buy the stock at $60.00 per share… and with the “10% Trade” I made yesterday, I’m getting paid $133.21 (assuming the dividend) to sell the stock at $62.50 per share.
So I’m getting paid to buy the stock at one price and I’m getting paid to sell it for even higher. And the capital gains will be a huge bonus.
In “Scenario 2” — like “Scenario 1” — I get to keep the $90.00 in covered call income ($0.90 x 100 shares). However, if Target trades above $62.50 and my shares get called away early, I may miss out on the dividend. This is ok, because even without the dividend the trade is generating a nice profit and huge annualized yield.
In this scenario, after commissions I’ll be looking at a $322.42 profit.
From a percentage standpoint, this “10% Trade” will deliver an instant 1.5% yield for selling the covered calls ($0.90 / $60.00) and a 4.2% yield from capital gains ($2.50 per share / $60.00). After subtracting out the commissions, I’m looking at a 5.4% total return in 32 days.
That works out to a 61.3% annualized yield from Target. If I collect the dividend, that figure jumps up to 71.2%.
That’s the power of a “10% Trade.”
As long as the market continues to offer safe, income-generating opportunities like this one, I’ll be more than happy to take them. Especially if they give me a “backdoor” way to contribute extra cash to my Roth IRA.
Greg Patrick
TradesOfTheDay.com
P.S. I realize the typical financial advisor may think it’s crazy to trade individual stocks in a retirement account… no matter how safe the stocks may appear. And in many cases they’re probably right — especially if you’re not properly diversified and you’re heavily dependent on the income from this account. So I urge you not to blindly follow my lead today without first speaking to a professional advisor or doing your own due diligence and research. In addition, I’m not a tax advisor and I don’t claim to be… so please consult a professional for any tax related questions you have.
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