A “10% Trade” can be a great way to generate extra income from a stock you already own.
As a reminder, a “10% Trade” involves selling either a covered call or a cash-secured put on shares of a high-quality dividend growth stock.
These are conservative, income-oriented trades that typically last just six to 10 weeks… but the beauty is, when you add up all the income you collect from selling the call or put, you could generate annual yields of 10%-plus.
Here’s a specific example of what I’m talking about…
Back on June 25, 2014, as part of a “10% Trade”, I bought 100 shares of Deere & Co. (DE) for $90.71 per share.
The stock has gone up and down since then, but it’s ultimately trading for about the same price I bought it at.
[hana-code-insert name=’adsense-article’ /]However, since owning shares, I’ve collected $1.80 per share in dividend income ($0.60 x 3 quarterly dividends) and $4.80 per share in covered call income ($1.05 per share for the call I sold on June 25, 2014… $1.57 per share for the call I sold on December 3, 2014… and $2.18 per share for the call I just sold yesterday, which I will detail below).So I’ve collected a total of $6.60 per share in income.
That works out to a 7.3% yield on my $90.71 purchase price in about eight months.
At this pace, I should be able to generate a 10% annual yield on my 100 shares of DE.
With this in mind, here are the details behind my latest “10% Trade” with Deere & Co. (DE)…
Opportunity to Capture a 23.4% to 35.8% Annualized Yield from DE
Yesterday, I sold one March 27, $92.00 covered call for $2.18 per share. I sold this call on the 100 shares of DE that I purchased for $90.71 per share through a previous “10% Trade”.
There are two likely ways this trade will work out… and they both offer the potential to generate at least 10% annualized income on my original purchase price.
Scenario #1: Deere stays under $92.00 by March 27
If Deere stays under $92.00 by March 27, I’ll get to keep my 100 shares.
In the process I’ll also have received $218 in covered call income ($2.18 x 100 shares), before commissions and fees.
The covered call income — known as a “premium” in the options world — 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 $209.23 in profit after commissions.
On a percentage basis, I received an instant 2.4% yield for selling the covered call ($2.19 / $90.71).
When I subtract out the commissions I’m looking at a 2.3% yield in 36 days… which works out to a 23.4% annualized yield. That’s over eight times Deere’s “regular” annual dividend yield of 2.7% (as well as my yield-on-cost)… so I’ll be happy to take it!
Scenario #2: Deere climbs over $92.00 by March 27
If Deere climbs over $92.00 by March 27 my 100 shares will get sold (“called away”) at $92.00 per share.
In this scenario, not only will I get to keep the $218 in covered call income ($2.18 x 100 shares), but I’ll also realize $129 in capital gains (($92.00 – $90.71) x 100 shares) in the process. Remember, I bought the stock at $90.71 per share and I’d be selling it at $92.00 per share.
In this scenario, after commissions I’ll be looking at a profit of $320.25.
From a percentage standpoint, this “10% Trade” will deliver an instant 2.4% yield for selling the covered call ($2.18 / $90.71) and a 1.4% return from a capital gain ($1.29 / $90.71).
After subtracting out the commissions, I’m looking at a 3.5% total return in 36 days, which works out to a 35.8% annualized yield from Deere.
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.