On Friday, I sold one May 20, $92.50 covered call on Chevron (CVX) for $2.00 per share. I sold this call on the 100 shares of CVX that I purchased at $90.60 per share through a 10% Trade I made last July. These are the same shares I sold a call on back in December as well.
There are two likely ways this trade will work out… and they both offer the potential to generate at least 10% annualized income on my original purchase price…
Scenario #1: Chevron stays under $92.50 by May 20
If Chevron stays under $92.50 by May 20 I’ll get to keep my 100 shares.
In the process, I’ll also have received $200.00 in covered call income ($2.00 x 100 shares).[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 401k retirement account.
At the end of the day, if “Scenario 1” plays out I’ll be looking at $191.25 in profit after commissions.
On a percentage basis, I received an instant 2.2% yield for selling the covered call ($2.00 / $90.60).
When I subtract out the commissions I’m looking at a 2.1% yield in 77 days… which works out to a 10.0% annualized yield. This doesn’t even include any upcoming dividends, which would further boost the yield.
Scenario #2: Chevron climbs over $92.50 by May 20
If Chevron climbs over $92.50 by May 20 my 100 shares will get sold (“called away”) at $92.50 per share.
In “Scenario 2″ — like “Scenario 1″ — I get to keep the $200.00 in covered call income ($2.00 x 100 shares). I’ll also generate $190.00 in capital gains ($1.90 X 100).
In this scenario, after commissions I’ll be looking at a $373.06 profit.
From a percentage standpoint, this “10% Trade” will deliver an instant 2.2% yield for selling the covered call ($2.00 / $90.60) and a 2.1% return from capital gains ($1.90 / $90.60).
After subtracting out the commissions, I’m looking at a 4.1% total return in 77 days.
That works out to a 19.5% annualized yield from Chevron. Again, this doesn’t even include any upcoming dividends, which would further boost the yield.
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’ /]