Yesterday I closed out my “10% Trade” with Starbucks (SBUX) and placed a brand new “10% Trade” with Microsoft (MSFT).
In short, closing the Starbucks trade early allowed me to capture 80% of the trade’s total potential income in a fraction of the time, giving me access to the cash 24 days ahead of the February 20 expiration.
I then deployed that cash into a brand new “10% Trade” with Microsoft. This new trade, which will last 24 days, is poised to generate significantly more income over the same time period than what the remainder of the Starbucks trade offered. It was a pretty compelling opportunity, so I jumped on it.
I added the details of the closed Starbucks trade to the Track Record page.
Below are the details of the new “10% Trade” I made with Microsoft.
Opportunity to Capture a 24.1% to 39.4% Annualized Yield from MSFT
Yesterday I bought 200 shares of Microsoft (MSFT) at $43.02 per share and simultaneously “sold to open” two February 20, $43 covered calls for $0.89 per share.
There are two likely ways this “10% Trade” will work out — and they both spell at least double-digit annualized yields on my purchase price…
Scenario #1: MSFT stays under $43 by February 20
If MSFT stays under $43 by February 20, I’ll get to keep my 200 shares.
In the process I’ll also have received $178.00 in covered call income ($0.89 x 200 shares) and $62.00 in dividend income ($0.31 X 200 shares).
The covered call income was collected instantly yesterday.
I’ll collect the dividend income on March 12.
At the end of the day, if “Scenario 1” plays out I’ll be looking at $222.52 in profit after commissions.
On a percentage basis, I received an instant 2.1% yield for selling the covered calls ($0.89 / $43.02) and I’ll receive a 0.7% yield from dividends ($0.31 / $43.02).
When I subtract out the commissions I’m looking at a 2.6% yield in 24 days, which works out to a 39.4% annualized yield.
In other words, this trade generates the equivalent of an entire year’s worth of Microsoft dividends in just 24 days. Talk about an income opportunity.
[hana-code-insert name=’adsense-article’ /]Scenario #2: MSFT climbs over $43 by February 20
If MSFT climbs over $43 by February 20 my 200 shares will get sold (“called away”) at $43 per share.
In “Scenario 2” — like “Scenario 1” — I get to keep the $178 in covered call income ($0.89 x 200 shares).
In the process, however, I’ll lose $4.00 from capital losses (($43-$43.02) x 200).
I won’t speculate as to whether I’ll collect the dividend income in this scenario, as shares could get called away early and disqualify me from collecting them.
In this scenario, after commissions (and not assuming any dividends), I’ll be looking at a $136.53 profit.
After subtracting out the commissions, I’m looking at a 1.6% total return in 24 days. That works out to a 24.1% annualized yield from MSFT.
Bottom Line: Either way this “10% Trade” works out offers me the opportunity to generate a 10%-plus annualized yield from Microsoft (MSFT). If I get to keep the 200 shares I just bought, compound my income, and “rinse and repeat” this process of selling calls to continue lowering my cost basis, great. Or, if I’m forced to sell MSFT for a 24.1% annualized profit, I’ll be happy with that scenario as well.
This is why I’m such a fan of “10% Trades”… and why I think anyone looking to safely boost their income in today’s volatile market should be taking advantage of them.
Greg Patrick
TradesOfTheDay.com