With shares up roughly 9% over the last month — and more importantly, trading once again near my purchase price of $48 per share — it seemed like a good time to make a new “10% Trade” with Microsoft (MSFT) on Friday.
My trade involved selling two December 18, $48 covered calls for $1.40 per share.
I sold these calls on the 200 shares that I had purchased for $48.00 per share during a previous “10% Trade”. These are the same shares I sold two calls on back in April as well.
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: Microsoft stays under $48 by December 18
If Microsoft stays under $48 by December 18 I’ll get to keep my 200 shares.
In the process, I’ll also have received $280.00 in covered call income ($1.40 x 200 shares) and $72.00 in dividend income ($0.36 x 200).[hana-code-insert name=’adsense-article’ /]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, which is my Roth IRA.
The dividend income will be collected on December 10.
At the end of the day, if “Scenario 1″ plays out I’ll be looking at $342.46 in profit after commissions.
On a percentage basis, I received an instant 2.9% yield for selling the covered calls ($1.40 / $48.00) and will capture a 0.8% yield from the upcoming dividend ($0.36 / $48.00).
When I subtract out the commissions I’m looking at a 3.6% yield in 70 days… which works out to an 18.6% annualized yield.
Scenario #2: Microsoft climbs over $48 by December 18
If Microsoft climbs over $48 by December 18 my 200 shares will get sold (“called away”) at $48 per share.
In “Scenario 2″ — like “Scenario 1″ — I get to keep the $280.00 in covered call income ($1.40 x 200 shares). Depending on when the shares get called away, I may or may not collect the upcoming dividend. Assuming I collect the dividend, that would add another $72.00 in income ($0.36 x 200 shares).
In this scenario, after commissions I’ll be looking at a $333.76 profit.
From a percentage standpoint, this “10% Trade” will deliver an instant 2.9% yield for selling the covered calls ($1.40 / $48.00) and a potential 0.8% yield from the upcoming dividend ($0.36 / $48.00).
After subtracting out the commissions, I’m looking at a 3.5% total return in 70 days.
That works out to an 18.1% annualized yield from Microsoft.
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’ /]