One of my favorite ways to generate extra income in today’s market continues to be through what I call a “10% Trade.”
And one of my favorite stocks to make these trades with continues to be Apple (AAPL).
In short, Apple is a “world-dominating” company… it’s growing its dividend and buying back its own shares… it pays HUGE income by way of options premiums… it’s a great stock to hold for the long-term… and it has a trifecta of share-price catalysts that indicate shares are undervalued at current levels.
Add it all up, and we’re looking at the perfect candidate for a “10% Trade.”
[hana-code-insert name=’adsense-article’ /]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 high-quality dividend growth stock trading at a reasonable price.While these trades typically last six to 10 weeks, this time frame certainly isn’t set in stone.
Consider the “10% Trade” I made with Apple on Friday: it will last just 35 days and will likely generate a 34.8% to 36.5% annualized yield in the process.
Here’s how…
Capturing a 34.8% to 36.5% Annualized Yield from Apple
On Friday I bought 100 shares of Apple for $127.71 per share and simultaneously sold one April 24, $128.00 covered call for $4.35 per share.
There are likely two possible ways this trade will work out… and they both spell at least double-digit annualized yields on my $127.71 purchase price.
Scenario #1: AAPL stays under $128.00 by April 24
If AAPL stays under $128.00 by April 24 I’ll get to keep my 100 shares.
This is a critical point to understand, and it’s why I ONLY make these trades with stocks that 1) I’d like to own anyways and 2) that I believe are already trading at reasonable prices.
In other words, if I already like the underlying stock — and if I think it’s already trading at a reasonable price — then if I’m “stuck” holding shares at expiration (April 24) then that’s perfectly fine with me.
On the other hand, I’m not going to be too happy if I’m left holding shares of a stock I really don’t want to own or that I had paid too much for in the first place.
In this scenario, excluding commissions, I will have received $435 in covered call income ($4.35 x 100 shares).
The covered call income — known as a “premium” in the options world — was collected instantly on Friday. It was deposited in the account where I made the trade.
At the end of the day, if “Scenario 1” plays out I’ll be looking at a profit of $426.30 after commissions.
On a percentage basis, I received an instant 3.4% yield for selling the covered call ($4.35 / $127.71).
When I subtract out the commissions I’m looking at a 3.3% yield in 35 days… which works out to a 34.8% annualized yield. Not bad considering Apple’s current forward dividend yield over the next 12 months is just 1.5%.
Scenario #2: AAPL climbs over $128.00 by April 24
If AAPL climbs over $124.00 by April 24, my 100 shares will get sold (“called away”) at $128.00 per share.
In this scenario, I’ll have collected $435 in covered call income ($4.35 x 100 shares) and $29.00 in capital gains [($128-127.71) x 100 shares].
After commissions, I’ll be looking at a profit of $446.60.
From a percentage standpoint, this “10% Trade” will deliver an instant 3.4% yield for selling the covered calls ($4.35 / $127.71) and a 0.2% return from capital gains ($0.29 / $127.71).
After subtracting out the commissions, I’m looking at a 3.5% total return in 35 days, which works out to a 36.5% 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), a high-quality dividend growth stock that appears to be trading at a reasonable price. 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