While I already own Microsoft (MSFT) in my long-term dividend growth portfolio — and plan on holding it for the long-haul — I’m always open to potential “10% Trade” opportunities with the stock that could safely boost my income.
With this in mind, Microsoft’s post-earnings pullback has created a compelling new “10% Trade” opportunity which I’m taking advantage of right now.
The trade allows me to generate a 10%-plus annualized yield from one of the highest-quality companies in the world, and I may not even need to buy its stock (although I’ll be happy if I do).
Here’s how it works…
At the time I made my trade yesterday, Microsoft was selling for $49.98 per share and the July 15, $48.00 puts were going for $1.18 per share.
My “10% Trade” involved selling one of these puts… and there are only two possible ways this trade will work out.
On one hand, I’d get to generate an 11.2% annualized yield from Microsoft without even owning the stock. On the other hand, I’d get paid about 2% in income to buy Microsoft at a 4% discount.
That said, I’ll be happy however this trade works out.
Let’s take a closer look at each scenario…
Scenario 1: MSFT falls below $48.00 by July 15
If Microsoft falls below $48.00 by July 15, I’ll be obligated to buy 100 shares at $48.00 per share.
That’s a 4% discount to the $49.98 price the stock was trading for when I sold the put yesterday… but more importantly, I’m getting paid about 2% in income for agreeing to buy the stock at that price.
You see, in exchange for my agreement, I collected an instant $118 (100 shares X $1.18 per share) before commissions.
One neat thing about the trade is that since I made it my Roth IRA, it essentially served as a legal “backdoor” way to contribute extra money to that account even though I’m no longer eligible to. I’ve explained how this works before.
Taking this income into consideration – and subtracting out the commissions – my cost-basis will actually drop to $46.99 per share.
That’s a 6.0% discount to the $49.98 share price that Microsoft was selling for at the time I made this trade, and a roughly 16% discount to what it was trading for just a couple weeks ago. At the same time, the trade is giving me a “backdoor” way to contribute some extra cash to my Roth IRA.
Scenario 2: MSFT stays above $48.00 by July 15
If Microsoft stays above $48.00 by July 15, the contract expires worthless and I get to keep the $118.00 in income (before commissions).
After $8.75 in commissions, this works out to a 2.3% return on what my purchase obligation would have been ($1.18 / $48.00) in 74 days.
That may not sound like a big deal, but if I can repeat this trade over the period of a year I could generate an 11.2% yield from Microsoft without even buying shares.
I’ll continue to keep my eyes open for safe, income-generating opportunities like this one — especially during earnings season, when high-quality dividend growers can temporarily go on sale and when volatility can send options premiums soaring.
P.S. I realize the typical financial advisor may think it’s crazy to trade individual stocks in a retirement account… no matter how safe the stocks may appear. And in many cases they’re probably right — especially if you’re not properly diversified and you’re heavily dependent on the income from this account. So I urge you not to blindly follow my lead today without first speaking to a professional advisor or doing your own due diligence and research. In addition, I’m not a tax advisor and I don’t claim to be… so please consult a professional for any tax related questions you have.