Apple (AAPL) continues to be a great stock to consider for a “10% Trade.”
In short, it’s a high-quality company, it’s growing its dividend, it looks significantly undervalued, and it pays HUGE income by way of options premiums.
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 1) high-quality 2) dividend growth stock 3) trading at a reasonable price.
At current prices, Apple seems to meet all three criteria, which makes it an ideal candidate for one of these trades.
While these trades typically last six to 10 weeks, this time frame isn’t set in stone.
Sometimes they last longer… sometimes shorter. Sometimes much shorter. Yet the income they generate can be significant.
Consider the “10% Trade” I made with Apple yesterday: it lasts just 15 days yet pays me the equivalent of over one year’s worth of dividend income, immediately, for simply agreeing to buy the stock at a cheaper price than what I just got paid to sell it for (I’ll explain this part in a moment).
Since I’m already interested in buying shares at their current price level, then of course I’m interested in getting paid for the opportunity to buy them for even cheaper than what I just sold them for.
Here’s what I’m talking about…[hana-code-insert name=’adsense-article’ /]At the time I made the trade yesterday, AAPL was selling for $127.37 per share and the May 15, $127 puts were going for $2.69 per share.
My “10% Trade” involved selling one of these puts (that’s 100 shares)… and there are only two possible ways this trade will work out.
On one hand, I’d get to generate a 49.9% annualized yield from AAPL without even having to buy those 100 shares.
On the other hand, I’d get to buy 100 shares of AAPL at a slight discount to what I just sold them for (through a”10% Trade” I made with Apple last month, which involved selling a cover call, I collected $435 for agreeing to sell the stock at $128 per share. With this new trade, I collected $269 for agreeing to buy the stock back at $127 per share).
With this in mind, I’ll be happy with either scenario.
Let’s take a closer look at how each would play out…
Scenario 1: AAPL falls below $127 by May 15
If AAPL trades below $127 by May 15, I may be obligated to buy 100 shares at $127 per share.
In exchange for my agreement, I was paid an instant $269.00 (100 shares X $2.69 per share) before commissions. This money was deposited into my account immediately.
Taking this income into consideration – and subtracting out the commissions – my cost basis drops to $124.48 per share.
That’s a 2.3% discount to the $127.37 share price that AAPL was selling for at the time I made this trade yesterday.
Bottom line? In “Scenario 1” I get paid instant cash while waiting for the opportunity to buy back 100 shares of AAPL at a slight discount to what I just sold them for.
Scenario 2: AAPL stays above $127 by May 15
If AAPL stays above $127 by May 15, the contract expires worthless. That means I won’t be required to buy the 100 shares of stock… yet I still get to keep the $269.00 in income (before commissions).
After commissions, this works out to a 2.1% return on what my purchase obligation would have been ($2.69 / $127) in just 15 days.
If I can repeat this trade over the period of a year I could generate a 49.9% yield from AAPL without even owning the stock. Compare this yield to the stock’s “regular” forward annual dividend yield of 1.6% at current prices.
I’ll continue to keep you posted as I make these trades, but please keep in mind that they’re not intended to be specific recommendations for you as an individual. Everyone has different financial situations, risk tolerance, goals, time frames, etc.
Instead, I’m sharing these real-life, real-money “10% Trades” as examples — so you can see for yourself how it’s entirely possible to safely double… triple… or even quadruple your yield on some of the best companies in the world.