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 the Euro STOXX 50 ETF (FEZ), a fund that tracks the Euro STOXX 50 Index, which includes multinational European blue chips…
Opportunity to Capture a 22.5% to 30.8% Annualized Yield from FEZ
On Friday I bought 100 shares of FEZ for $30.53 per share and simultaneously “sold to open” one August 19, $31.00 covered call for $1.14 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: FEZ stays under $31.00 by August 19
If FEZ stays under $31.00 by August 19, I’ll get to keep my 100 shares.
In the process I’ll also have received $114.00 in covered call income ($1.14 x 100 shares).
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 401(k) retirement account.
At the end of the day, if “Scenario 1” plays out I’ll be looking at $105.25 in profit after commissions and fees.
On a percentage basis, I received an instant 3.7% yield for selling the covered call ($1.14 / $30.53).
When I subtract out the commissions and fees I’m looking at a 3.4% yield in 56 days, which works out to a 22.5% annualized yield.
Scenario #2: FEZ climbs over $31.00 by August 19
If FEZ climbs over $31.00 by August 19 my 100 shares will get sold (“called away”) at $31.00 per share.
Like “Scenario 1”, I get to keep the $114 in covered call income ($1.14 x 100 shares)… but I’ll also generate $47 in capital gains ($0.47 X 100).
In this scenario, after commissions and fees I’ll be looking at a $144.06 profit.
From a percentage standpoint, this “10% Trade” will deliver an instant 3.7% yield for selling the covered call ($1.14 / $30.53) and a 1.5% return from capital gains ($0.47 / $30.53).
After subtracting out the commissions and fees, I’m looking at a 4.7% total return in 56 days.
That works out to a 30.8% annualized yield from FEZ. Not bad, considering the fund’s “regular” yield is 3.1%.
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’ /]