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 the “10% Trade” I just made with Target (TGT), a Dividend Champion that’s pulled back roughly 17% over the past two months…
Opportunity to Capture a 22.9% to 25.8% Annualized Yield from Target
Yesterday I bought 100 shares of TGT for $67.72 per share and simultaneously “sold to open” one July 22, $68.00 covered call for $1.66 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: Target stays under $68.00 by July 22
If Target stays under $68.00 by July 22, I’ll get to keep my 100 shares.
In the process I’ll also have received $166.00 in covered call income ($1.66 x 100 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 401(k) retirement account.
At the end of the day, if “Scenario 1” plays out I’ll be looking at $157.25 in profit after commissions and fees.
On a percentage basis, I received an instant 2.5% yield for selling the covered call ($1.66 / $67.72).
When I subtract out the commissions and fees I’m looking at a 2.3% yield in 37 days, which works out to a 22.9% annualized yield.
Scenario #2: Target climbs over $68.00 by July 22
If Target climbs over $68.00 by July 22 my 100 shares will get sold (“called away”) at $68.00 per share.
Like “Scenario 1”, I get to keep the $166 in covered call income ($1.66 x 100 shares)… but I’ll also generate $28 in capital gains ($0.28 X 100).
In this scenario, after commissions and fees I’ll be looking at a $177.06 profit.
From a percentage standpoint, this “10% Trade” will deliver an instant 2.5% yield for selling the covered call ($1.66 / $67.72) and a 0.4% return from capital gains ($0.28 / $67.72).
After subtracting out the commissions and fees, I’m looking at a 2.6% total return in 37 days.
That works out to a 25.8% annualized yield from Target. Not bad, considering the stock’s “regular” yield is 3.6%.
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.[hana-code-insert name=’MMPress’ /]