As a refresher, a “10% Trade” is a conservative income-oriented trade that involves selling either a covered call or a cash-secured put on a reasonably-priced, high-quality dividend growth stock.
When we sell a covered call we collect immediate income in exchange for agreeing to sell a stock we own at a higher price than what we paid for it.
When we sell a cash-secured put we collect immediate income in exchange for agreeing to buy a stock we’re interested in at a lower price than what it’s currently trading for.
These trades typically last just six to 10 weeks, and the immediate income we collect from them generate annualized yields of at least 10%. Sometimes much higher.
Consider the “10% Trade” I made with Aflac (AFL) yesterday…
Capturing a 15.2% to 54.5% Annualized Yield from Aflac
Yesterday I sold two December 20, $60.00 covered calls for $0.67 per share. I sold these calls on the shares I bought back on September 22 through another “10% Trade.” You can review the details of that original trade here and the results here.
There are only two possible ways this new trade will work out… and they both spell at least double-digit annualized yields on my $58.32 purchase price — the price I paid back in September.
Scenario #1: Aflac stays under $60.00 by December 20
If Aflac stays under $60.00 by December 20 I’ll get to keep my 200 shares.
In the process I’ll also have received $134 in covered call income ($0.67 x 200 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 $126.05 in profit after commissions.
On a percentage basis, I received an instant 1.1% yield for selling the covered calls ($0.67 / $58.32).
When I subtract out the commissions I’m looking at a 1.1% yield in 26 days… which works out to a 15.2% annualized yield. That’s over five times Aflac’s “regular” annual dividend yield of 2.6%. I’ll take it!
Scenario #2: Aflac climbs over $60.00 by December 20
If Aflac climbs over $60.00 by December 20 my 200 shares will get sold (“called away”) at $60.00 per share.
In this scenario, not only will I get to keep the $134 in covered call income ($0.67 x 200 shares), but I’ll also generate $336.00 in capital gains ($1.68 x 200 shares) in the process. Remember, I bought the stock at $58.32 per share.
In this scenario, after commissions I’ll be looking at a $452.60 profit.
From a percentage standpoint, this “10% Trade” will deliver an instant 1.1% yield for selling the covered calls ($0.67 / $58.32) and a 2.9% return from capital gains ($1.68 / $58.32).
After subtracting out the commissions, I’m looking at a 3.9% total return in 26 days, which works out to a whopping 54.5% annualized yield from Aflac.
Bottom Line: Either way this “10% Trade” works out offers me the opportunity to pull in at least a 10% annualized yield from Aflac (AFL). As long as the market continues to offer safe, income-generating opportunities like this one, I’ll be more than happy to take them.
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.