A “10% Trade” can be a safe way to boost your income on some of the best companies in the world.[hana-code-insert name=’adsense-article’ /]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.
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 Coca-Cola (KO), a safe Dividend King now trading near its 52-week low…
Opportunity to Capture a 12.1% to 15.7% Annualized Yield from KO
On Friday I bought 200 shares of KO for $40.26 per share and simultaneously “sold to open” two February 17, $40.00 covered calls for $1.38 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: KO stays under $40.00 by February 17
If KO stays under $40.00 by February 17, I’ll get to keep my 200 shares.
In the process I’ll also have received $276.00 in covered call income ($1.38 x 200 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 $266.46 in profit after commissions and fees.
On a percentage basis, I received an instant 3.4% yield for selling the covered call ($1.38 / $40.26).
When I subtract out the commissions and fees I’m looking at a 3.3% yield in 77 days, which works out to a 15.7% annualized yield.
Scenario #2: KO climbs over $40.00 by February 17
If KO climbs over $40.00 by February 17 my 200 shares will get sold (“called away”) at $40.00 per share.
Like “Scenario 1”, I get to keep the $276 in covered call income ($1.38 x 200 shares)… but I’ll incur a $52 capital loss (-$0.26 X 200) since I bought shares at $40.26 and will be selling at $40.
In this scenario, after commissions and fees I’ll still be looking at a $204.92 profit.
From a percentage standpoint, this “10% Trade” will deliver an instant 3.4% yield for selling the covered call ($1.38 / $40.26) and a -0.6% capital loss (-$0.26 / $40.26).
After subtracting out the commissions and fees, I’m looking at a 2.5% total return in 77 days.
That works out to a 12.1% annualized yield from KO. Not bad, considering the stock’s “regular” yield is 3.47%.
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’ /]