With shares up roughly 9% since mid-September — and more importantly, now trading above my purchase price — it seemed like a good time to make a new “10% Trade” with Coca-Cola (KO) yesterday.
My trade involved selling three November 20, $41 covered calls for $1.20 per share.
There are likely two ways this trade will work out — and they both spell at least double-digit annualized yields on my purchase price…
Scenario #1: Coca-Cola stays under $41 by November 20
If Coca-Cola stays under $41 by November 20 I’ll get to keep my 300 shares.
In the process I’ll also have received $360.00 in covered call income ($1.20 x 300 shares).[hana-code-insert name=’adsense-article’ /]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, which is my 401k retirement account.
At the end of the day, if “Scenario 1″ plays out I’ll be looking at $349.66 in profit after commissions.
On a percentage basis, I received an instant 3.0% yield for selling the covered calls ($1.20 / $40.42).
When I subtract out the commissions I’m looking at a 2.9% yield in 44 days… which works out to a 23.9% annualized yield.
Scenario #2: Coca-Cola climbs over $41 by November 20
If Coca-Cola climbs over $41 by November 20 my 300 shares will get sold (“called away”) at $41 per share.
In “Scenario 2″ — like “Scenario 1″ — I get to keep the $360 in covered call income ($1.20 x 300 shares). I’ll also generate $174.00 in capital gains ($0.58 X 300).
In this scenario, after commissions I’ll be looking at a $513.32 profit.
From a percentage standpoint, this “10% Trade” will deliver an instant 3.0% yield for selling the covered calls ($1.20 / $40.42) and a 1.4% return from capital gains ($0.58 / $40.42).
After subtracting out the commissions, I’m looking at a 4.2% total return in 44 days.
That works out to a 35.1% annualized yield from Coca-Cola.
P.S. The reason I’ve gone public with many of my real-life, real-money “10% Trades” is so you can see for yourself how entirely possible it is to boost your annualized yield on high-quality dividend growth stocks. Just keep in mind that these trades aren’t intended to be specific recommendations for you as an individual. Everyone has different financial situations, risk tolerance, goals, time frames, etc.[hana-code-insert name=’MMPress’ /]