I Just Made This Tax-Free “10% Trade” with Microsoft (MSFT)

[stextbox id=”info”]Please keep in mind that these “10% Trade” alerts are for information purposes only. We’re not registered financial advisors and these aren’t specific trade recommendations for you as an individual. Each of our readers have different financial situations, risk tolerance, goals, time frames, etc. The ideas we publish are simply ideas that we feel fit our specific needs and that we’re personally making in our own portfolios. You should also be aware that some of the trade details (specifically stock prices and options premiums) are certain to change from the time we make our trade to the time you’re alerted about it. So please don’t attempt to make this “10% Trade” yourself without first doing your own due diligence and research.[/stextbox]

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.

MSFT is in a clear bull channel

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”…

"10% Trade" with Microsoft (MSFT)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.

Greg Patrick

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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