While I already own Microsoft (MSFT) 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 safely boost my income.
But why Microsoft, and why now?
In short, not only is it a “cash-gushing powerhouse with thick, consistent profit margins and a huge competitive moat around its business”… but it pays an above average yield and a dividend that’s steadily-growing.
In addition, if Serge Berger is right, then it’s likely to move higher in the weeks ahead — possibly to $50 per share.
As you can see in the chart above, Microsoft is in a bull channel with clearly-defined levels of resistance and support.
One way to play this setup, which offers solid risk-to-reward, is to wait for shares to pullback near the stock’s uptrending support line before buying.
Another way is to make a “10% Trade” by selling a put and collecting income while waiting for shares to hit our target purchase price. As Andy Crowder has pointed out, a put-selling strategy has the highest probability of any strategy in the investment universe. It offers both income AND safety.
It’s this second option that I chose yesterday, by way of a “10% Trade”…
At the time I made my trade yesterday, Microsoft was selling for $48.39 per share and the January 17, $48.00 puts were going for $1.04 per share.
My “10% Trade” involved selling two of these puts… and there are only two possible ways this trade will work out.
On one hand, I’d get to generate a 16.4% annualized yield from Microsoft without even owning the stock. On the other hand, I’d get paid to buy Microsoft at $48.00 per share.
That said, I’ll be happy however this trade works out.
Let’s take a closer look at each scenario…
Scenario 1: MSFT falls below $48.00 by January 17
If Microsoft falls below $48.00 by January 17, I’ll be obligated to buy 200 shares at $48.00 per share.
That’s a little cheaper than the $48.39 price the stock was trading for when I sold the puts yesterday… but more importantly, I’m getting paid for agreeing to buy the stock at that price.
You see, in exchange for my agreement, I collected an instant $208 (200 shares X $1.04 per share) before commissions.[hana-code-insert name=’adsense-article’ /]This money was deposited into my account immediately.
One neat thing about the 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.
Taking this income into consideration – and subtracting out the commissions – my cost-basis will actually drop to $47.05 per share.
That’s a 2.8% discount to the $48.39 share price that Microsoft was selling for at the time I made this trade. AND, it’s giving me a “backdoor” way to contribute that cash to my Roth IRA. I’ll take it!
Scenario 2: MSFT stays above $48.00 by January 17
If Microsoft stays above $48.00 by January 17, the contract expires worthless and I get to keep the $208.00 in income (before commissions).
After commissions, this works out to a 2.1% return on what my purchase obligation would have been ($1.04 / $48.00) in only 46 days.
That may not sound like a big deal, but if I can repeat this trade over the period of a year I could generate a 16.4% yield from Microsoft without even buying shares.
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.
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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