A “10% Trade” can be a great way to collect safe, high-income while waiting to buy a stock you like at a discount to what it’s currently trading for.
If you already like the stock at current prices, then getting paid for the opportunity to buy it at even cheaper prices may seem too good to be true.
But the fact is, this is exactly what we’re doing whenever we make a “10% Trade” that involves selling a cash-secured put on a stock that’s already trading at a reasonable price.
[hana-code-insert name=’adsense-article’ /]Consider the “10% Trade” I made with Chevron (CVX) yesterday…At the time I made the trade, Chevron was selling for $115.06 per share and the November 22, $112.00 puts were going for $1.44 per share.
My “10% Trade” involved selling one of these puts (that’s 100 shares)… and there are only two possible ways this trade will work out.
On one hand, I’d get to generate a 24.6% annualized yield from Chevron without even having to buy those 100 shares.
On the other hand, I’d get to buy 100 shares of Chevron at a 3.8% discount to what they were trading for at the time I executed the trade yesterday.
Since safe, double-digit annualized income is a no-brainer — and since I’m interested in buying more shares of Chevron at current prices anyways (let alone an additional 3.8% discount) — either scenario works for me.
Let’s take a closer look at how each would play out…
Scenario 1: Chevron falls below $112 by November 22
If Chevron falls below $112 by November 22, I’ll be obligated to buy 100 shares at $112 per share. That’s cheaper than the $115.06 price the stock was trading for when I sold the put yesterday.
In addition, in exchange for my agreement, I was paid an instant $144.00 (100 shares X $1.44 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 $110.72 per share.
That’s a 3.8% discount to the $115.06 share price that Chevron was selling for at the time I made this trade yesterday
Bottom line? In “Scenario 1” I get paid instant cash while waiting for the opportunity to buy Chevron at a discount. I’ll take it!
Scenario 2: Chevron stays above $112 by November 22
If Chevron stays above $112 by November 22, the contract expires worthless. That means I won’t be required to buy the 100 shares of stock… yet I still get to keep the $144.00 in income (before commissions).
After commissions, this works out to a 1.2% return on what my purchase obligation would have been ($1.44 / $112) in just 18 days.
If I can repeat this trade over the period of a year I could generate a 24.6% yield from Chevron without even owning the stock. Compare this yield to the stock’s “regular” annual dividend yield of 3.7% at current prices.
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 Chevron (CVX). To see the results of my previously published trade, 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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