For about a year now I’ve been telling you about one of my favorite ways to generate extra income in the stock market.
It’s a way to safely double… triple… or even quadruple your annualized yield from some of the world’s best companies.
In short, the strategy I’m talking about — which I call a “10% Trade” — involves selling either a covered call or a cash-secured put on a high-quality dividend growth stock that’s trading at a reasonable price.
When executed properly, the beauty of a “10% Trade” is that even shares of a relatively safe stock like Microsoft (MSFT) can deliver a 10%-plus annualized yield. That’s over triple the stock’s “regular” annual yield of 3.0%.
“10% Trade” opportunities aren’t limited to just Microsoft, though. Take a look at the list below. All of these are real-life “10% Trades” I’ve closed out over the past year…
- “10% Trade” with Microsoft (MSFT) lasted 30 days for a 35.4% annualized yield
- “10% Trade” with Apple (AAPL) lasted 35 days for a 36.5% annualized yield
- “10% Trade” with Microsoft (MSFT) lasted 24 days for a 35.1% annualized yield
- “10% Trade” with Apple (AAPL) lasted 16 days for an 86.2% annualized yield
- “10% Trade” with Starbucks (SBUX) lasted 22 days for a 40.8% annualized yield
- “10% Trade” with Coca-Cola (KO) lasted 33 days for a 26.0% annualized yield
- “10% Trade” with Chevron (CVX) lasted 18 days for a 24.6% annualized yield
- “10% Trade” with Coca-Cola (KO) lasted 31 days for an 18.6% annualized yield
- “10% Trade” with Wells Fargo (WFC) lasted 72 days for a 22.4% annualized yield
- “10% Trade” with Target (TGT) lasted 24 days for an 81.9% annualized yield
- “10% Trade” with Chevron (CVX) lasted 29 days for a 28.7% annualized yield
- “10% Trade” with Apple (AAPL) lasted 4 days for a 184.7% annualized yield
- “10% Trade” with Walgreens (WAG) lasted 66 days for a 15.2% annualized yield
- “10% Trade” with Wal-Mart (WMT) lasted 32 days for a 10.5% annualized yield
- “10% Trade” with Apple (AAPL) lasted 43 days for a 10.4% annualized yield
- “10% Trade” with Target (TGT) lasted 43 days for a 25.1% annualized yield
- “10% Trade” with Aflac (AFL) lasted 78 days for a 10.0% annualized yield
- “10% Trade” with Apple (AAPL) lasted 39 days for an 11.8% annualized yield
- “10% Trade” with IBM (IBM) lasted 39 days for an 11.6% annualized yield
- “10% Trade” with Wal-Mart (WMT) lasted 25 days for an 11.2% annualized yield
- “10% Trade” with Target (TGT) lasted 45 days for a 10.0% annualized yield
- “10% Trade” with Microsoft (MSFT) lasted 60 days for a 10.6% annualized yield
- “10% Trade” with McDonald’s (MCD) lasted 36 days for a 10.6% annualized yield
- “10% Trade” with Cisco (CSCO) lasted 75 days for a 22.2% annualized yield
- “10% Trade” with Pepsi (PEP) lasted 65 days for a 16.6% annualized yield
- “10% Trade” with Coca-Cola (KO) lasted 60 days for a 20.0% annualized yield
- “10% Trade” with Wal-Mart (WMT) lasted 58 days for a 32.5% annualized yield
- “10% Trade” with Microsoft (MSFT) lasted 54 days for a 43.8% annualized yield
Unfortunately, many investors will never take advantage of these income opportunities. And I think that’s too bad, because they could be missing out on hundreds or even thousands of dollars in extra income each month.
The problem is, I think most people are simply unfamiliar with how these trades work… or they think they’re too complicated to understand.
[hana-code-insert name=’adsense-article’ /]Or perhaps they think they’re riskier than a conventional stock trade.But none of these things are necessarily true…
In fact, if executed properly, not only is a “10% Trade” relatively simple to make, but it can be much safer than a conventional stock trade.
There are many reasons for this, but today I’ll give you just one: In short, a “10% Trade” can pay you even if your underlying stock goes nowhere.
I realize that may sound crazy, so let me show you a specific example of what I’m talking about…
How I’m Making Money On a Stock That’s Gone Nowhere
Back on December 2, 2014, I made a “10% Trade” that involved selling two cash-secured puts on Microsoft (MSFT).
At the time I made my trade, Microsoft was selling for $48.39 per share and the January 17, $48.00 puts were going for $1.04 per share. My “10% Trade” involved selling two of these puts.
Here’s what the trade boiled down to: I was paid $208 for agreeing to buy 200 shares of Microsoft at a price of $48 per share. Since the stock was trading under $48 on January 17, the options expiration date, I was assigned the 200 shares and I’ve been holding them ever since. So to recap, I was paid $208 to buy 200 shares of Microsoft at $48 per share.
Since buying shares, the price of Microsoft has both dropped and rebounded… but it’s ultimately back to where we started: $48 per share. In other words, the stock has essentially gone nowhere.
Now, if I had made a conventional stock trade on December 2 (instead of a “10% Trade”) and simply bought shares at the market price, I would own 200 shares at a cost of $48.39 per share. Considering that Microsoft is trading at about $48 per share today, and that it’s paid a $0.31 per share dividend, I’d be about dead-even today. I wouldn’t have made any money and I wouldn’t have lost any money.
However, thanks to the “10% Trade” strategy, not only did I buy shares at a slight discount ($48 vs. $48.39), but I also collected $208 in options income for selling the two puts. Throw in the $62 in dividend income that I collected in March and I’m sitting on a profit of about $270 today.
Not bad considering the stock is currently trading for the same price that I bought it for (which is my main point here).
But wait, it get’s better…
At this point I can make a second “10% Trade” on my 200 shares and generate even more income. In fact, I can add another $228 to my pocket right now by selling a round of covered calls on my shares.
With this in mind, that’s exactly what I just did (bringing my income tally up to $498). Here’s what the timeline looks like…
Here are the details behind the specific trade I just made…
Yesterday, I sold two June 19, $48.00 covered calls for $1.14 per share. I sold these calls on the 200 shares of MSFT that I purchased at $48.00 per share through the trade I initiated on December 2.
In short, I was paid $228 for agreeing to sell my 200 shares of Microsoft at a price of $48 per share. Whether I sell them or not depends on if Microsoft is trading above $48 per share by expiration day on June 19.
But in the meantime, and assuming shares don’t get called away too early, I’m in line to collect another $62 in dividend income.
Add it all up, and I’m actually looking at a total of $560 in dividend and options income. That’s a 5.8% yield in less than seven months on my $9,600 investment (200 shares x $48 per share).
Keep in mind, Microsoft’s forward annual dividend yield is 3.0%. But thanks to the two “10% Trades” I’ve detailed, I’m getting almost twice the income (5.8% vs. 3.0%) in a fraction of the time (7 months vs. 12 months).
At this rate, I’m still on pace to generate a 10% annualized yield from these Microsoft shares. Not bad for a stock that’s essentially gone nowhere.
This is just one example of how a “10% Trade” can be safer than a conventional stock trade. In short, you can generate hundreds of dollars in extra income even if the underlying stock trades sideways.
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.
Greg Patrick
TradesOfTheDay.com