A “10% Trade” can be a safe way to boost your income on some of the best companies in the world.
As a refresher, a “10% Trade” is a conservative income-oriented trade that involves selling either a covered call or a cash-secured put on a reasonably-priced, high-quality dividend growth stock.
Here’s where it gets neat…[hana-code-insert name=’adsense-article’ /]When you sell a cash-secured put, you can collect income for simply agreeing to buy a stock you like at a discount to what it’s currently trading for.
And when you sell a covered call, you can collect income for simply agreeing to sell a stock you already own at a higher price than what you bought it for.
So this strategy can pay you instant income while helping you buy low and sell high.
If you’re working with a high-quality dividend growth stock that you think is trading at a reasonable price, you may be looking at a low-risk opportunity to generate above average income.
Consider a few “10% Trades” I made with Wal-Mart (WMT) last year…
In 2014 I made three “10% Trades” with this Dividend Champion that generated hundreds of dollars in safe, instant income.
And I did so by simply agreeing to buy the stock for less than what it was selling for at the time I made my trade, and for simply agreeing to then sell the stock for higher than what I had paid for it. You can review the details of my specific trades here, here and here.
Since my last “10% Trade” closed out with Wal-Mart, I’ve been patiently waiting for a new opportunity. Now, thanks to the stock’s massive sell-off, I think I finally have one. With this in mind, I pulled the trigger on a new “10% Trade” with Wal-Mart yesterday.
The neat thing about this trade is that I’m buying the stock at one price and getting paid instant income for simply agreeing to sell that same stock at a higher price. At the same time, I’m buying the stock at a 22% discount to what I sold it for last year ($58.69 vs. $75).
Opportunity to Capture a 23.7% to 29.4% Annualized Yield from Wal-Mart
Yesterday I bought 200 shares of WMT for $58.69 per share and simultaneously “sold to open” two November 20, $59 covered calls for $1.15 per share.
With this in mind, 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: Wal-Mart stays under $59 by November 20
If Wal-Mart stays under $59 by November 20, I’ll get to keep my 200 shares.
In the process I’ll also have received $230.00 in covered call income ($1.15 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, which is my Roth IRA.
At the end of the day, if “Scenario 1” plays out I’ll be looking at $220.55 in profit after commissions and fees.
On a percentage basis, I received an instant 2.0% yield for selling the covered call ($1.15 / $58.69).
When I subtract out the commissions and fees I’m looking at a 1.9% yield in 29 days, which works out to a 23.7% annualized yield.[hana-code-insert name=’adsense-article’ /]Scenario #2: Wal-Mart climbs over $59 by November 20
If Wal-Mart climbs over $59 by November 20 my 200 shares will get sold (“called away”) at $59 per share. That’s fine with me because that’s more than what I bought them for.
Like “Scenario 1”, I still get to keep the $230 in covered call income ($1.15 x 200 shares)… but I’ll also generate $62 in capital gains ($0.31 X 200).
In this scenario, after commissions and fees I’ll be looking at a $274.36 profit.
From a percentage standpoint, this “10% Trade” will deliver and instant 2.0% yield for selling the covered call ($1.15 / $58.69) and a 0.5% return from capital gains ($0.31 / $58.69).
After subtracting out the commissions and fees, I’m looking at a 2.3% total return in 29 days.
That works out to a 29.4% annualized yield from Wal-Mart. Not bad, considering the stock’s “regular” yield is 3.3% right now.
P.S. I’ll continue to keep you posted as I make these trades, but please keep in mind that these aren’t intended to be specific recommendations. 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 boost your income from some of the best companies in the world.[hana-code-insert name=’MMPress’ /]