As we go to press, ConocoPhillips (COP) is trading for $64.29 per share.
Sam Collins recommends buying the stock for under $65, so both short-term traders and long-term investors have a green light to buy right now.
While most people would probably just buy shares at the market price, I’d prefer to make a “10% Trade” here.
In short, it offers us the opportunity to collect safe, double-digit annualized income on a high-quality dividend growth stock that appears to be undervalued at current levels.
Here’s how it works…
As I write, COP is selling for $64.29 per share and the April 17, $65.00 calls are going for about $1.79 per share.
Our “10% Trade” would involve buying 100 shares of COP and simultaneously selling one of those calls.
There would be two likely ways this trade will work out, and they both spell at least 10% annualized income.
Let’s take a closer look at each scenario…
Scenario #1: COP stays under $65 by April 17
If COP stays under $65 by April 17, we’d get to keep our 100 shares.
In the process, we’d receive $179.00 in covered call income ($1.79 x 100 shares).
The covered call income, which is known as “premium” in the options world, would be collected instantly.
At the end of the day, if “Scenario 1″ plays, we’d receive an instant 2.8% yield for selling the covered call ($1.79 / $64.29) in just 44 days. That works out to a 23.1% annualized yield.
[hana-code-insert name=’adsense-article’ /]Scenario #2: COP climbs over $65 by April 17
If COP climbs over $65 by April 17 our 100 shares will get sold (“called away”) at $65 per share.
In “Scenario 2” — like “Scenario 1” — we’d get to keep the $179 in covered call income ($1.79 x 100 shares). We’d also generate $71.00 in capital gains (($65-$64.29) x 100).
In this scenario, excluding commissions, we’d be looking at a $250.00 profit.
From a percentage standpoint, this “10% Trade” would deliver an instant 2.8% yield for selling the covered call ($1.79 / $64.29) and a 1.1% return from capital gains ($0.71 / $64.29).
Excluding commissions, we’d be looking at a 3.9% total return in 44 days, which works out to a 32.3% annualized yield from COP.
Like this setup? Here’s how we’d make the trade…
Place a “Buy-Write” options order with a Net Debit price of as close to $62.50 as you can get (the lower the better). Here’s how the order would look in E*Trade:
