Apple (AAPL) continues to be a great stock to consider for a “10% Trade.”
In short, it’s a high-quality company, it’s growing its dividend, it’s reasonably-priced, and it pays HUGE income by way of options premiums. It’s also a great stock to hold for the long-term.
[hana-code-insert name=’adsense-article’ /]Combined, all of these factors make it one of my favorite “10% Trade” candidates.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.
While these trades typically last six to 10 weeks, this isn’t set in stone.
Consider the “10% Trade” I made with Apple yesterday: it will last just 31 days and generate a 33.8% to 44.4% annualized yield in the process.
Here’s how…
Capturing a 33.8% to 44.4% Annualized Yield from Apple
Yesterday I sold one February 20, $110.00 covered call on AAPL for $3.22 per share. I sold this call on the 100 shares I bought through another “10% Trade” I made back in January. 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 $108.82 purchase price.
Scenario #1: AAPL stays under $110.00 by February 20
If AAPL stays under $110.00 by February 20 I’ll get to keep my 100 shares.
In the process I’ll have received $322 in covered call income ($3.22 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.
I’m also in line to collect $47.00 in dividend income ($0.47 x 100), but for this example, I’ll only take into account the covered call income since the dividend hasn’t been declared yet.
At the end of the day, if “Scenario 1″ plays out I’ll be looking at $312.01 in profit after commissions.
On a percentage basis, I received an instant 3.0% yield for selling the covered calls ($3.22 / $108.82).
When I subtract out the commissions I’m looking at a 2.9% yield in 31 days… which works out to a 33.8% annualized yield.
Scenario #2: AAPL climbs over $110.00 by February 20
If AAPL climbs over $110.00 by February 20, my 100 shares will get sold (“called away”) at $110.00 per share.
In this scenario, I’ll have collected $322 in covered call income ($3.22 x 100 shares) and $118.00 in capital gains ($1.18 x 100 shares).
After commissions, I’ll be looking at a profit of $410.02.
From a percentage standpoint, this “10% Trade” will deliver an instant 3.0% yield for selling the covered calls ($3.22 / $108.82) and a 1.1% return from capital gains ($1.18 / $108.82).
After subtracting out the commissions, I’m looking at a 3.8% total return in 31 days, which works out to an 44.4% annualized yield from AAPL.
Bottom Line: Either way this “10% Trade” works out offers me the opportunity to pull in at least a 10% annualized yield from Apple (AAPL). 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