Shares of one of the safest companies on the planet appear to be trading at a discount right now…
After a long-term uptrend that began in 2013, Microsoft (MSFT) — one of just three companies in the world to be awarded the coveted AAA rating from Standard and Poor’s — has taken a much-needed breather.
Thanks to the pullback, we now have an opportunity to buy shares of this high-quality dividend growth stock at a discount…
One way to play this opportunity would be to simply buy Microsoft shares at the market price, hold them, and reinvest the stock’s growing dividend.
An alternative way to play it would be through what I call a “10% Trade.”
As a refresher, a “10% Trade” is a conservative income-oriented trade that involves generating a 10%-plus annualized yield by selling either a covered call or a cash-secured put on a high-quality dividend growth stock trading at a reasonable price.
If you’ve never sold options before, you may be uncomfortable with the idea of learning something new.
But if you’re looking to boost your income, and to do it safely, you really owe it to yourself to understand how it all works.
Especially considering the setup we have today with Microsoft…
In short, while the company’s quarterly dividends equate to a 2.9% annual yield at current prices, a select “10% Trade” could deliver nearly 10x that income.
I’m personally taking advantage of this opportunity…
Capturing a 28.7% to 35.2% Annualized Yield from Microsoft
Yesterday, I bought 200 shares of Microsoft for $41.73 per share and simultaneously sold two April 24, $42.00 covered calls for $1.03 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 $41.73 purchase price.
Scenario #1: MSFT stays under $42.00 by April 24
If MSFT stays under $42.00 by April 24 I’ll get to keep my 200 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: I can simply collect the stock’s growing dividend while waiting for a new opportunity to sell another round of covered calls.[hana-code-insert name=’adsense-article’ /]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. So ONLY make these trades with stocks you’d be happy owning at the current price.
In this scenario, excluding commissions, I will have received $206 in covered call income ($1.03 x 200 shares).
The covered call income — known as a “premium” in the options world — was collected instantly yesterday. 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 $196.55 after commissions.
On a percentage basis, I received an instant 2.5% yield for selling the covered calls ($1.03 / $41.73).
When I subtract out the commissions I’m looking at a 2.4% yield in 30 days… which works out to a 28.7% annualized yield. Again, not bad considering Microsoft’s current forward dividend yield over the next 12 months is 2.9%.
Scenario #2: MSFT climbs over $42.00 by April 24
If MSFT climbs over $42.00 by April 24, my 200 shares will get sold (“called away”) at $42.00 per share.
In this scenario, I’ll have collected $206 in covered call income ($1.03 x 200 shares) and $54.00 in capital gains [($42-41.73) x 200 shares].
After commissions, I’ll be looking at a profit of $241.10.
From a percentage standpoint, this “10% Trade” will deliver an instant 2.5% yield for selling the covered calls ($1.03 / $41.73) and a 0.6% return from capital gains ($0.27 / $41.73).
After subtracting out the commissions, I’m looking at a 2.9% total return in 30 days, which works out to a 35.2% annualized yield from MSFT.
Bottom Line: As I’ve mentioned before, as long as the market continues to offer safe, income-generating opportunities like this one, I’ll be more than happy to take them. And I’ll continue to share these opportunities to Trades Of The Day readers, as well.