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 VF Corp. (VFC), a recent Dividend Growth Stock of the Month and one of the 29 stocks selected for Dave Van Knapp’s new dividend growth “ETF”…
Opportunity to Capture a 10.0% to 15.0% Annualized Yield from VFC
On Friday I bought 100 shares of VFC for $53.26 per share and simultaneously “sold to open” one August 18, $55.00 covered call for $3.36 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…
Please note: To be conservative, I don’t include any dividends in my calculations for either of the following scenarios. I require “10% Trades” to generate at least 10% annualized yields off of options premium and applicable capital gains alone. So any dividends collected are just “bonus” that will boost the overall annualized yields even further.
Scenario #1: VFC stays under $55 by August 18
If VFC stays under $55 by August 18, I’ll get to keep my 100 shares.
In the process I’ll also have received $336 in covered call income ($3.36 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 $326.55 in profit after commissions and fees.
On a percentage basis, I received an instant 6.3% yield for selling the covered call ($3.36 / $53.26).
When I subtract out the commissions and fees I’m looking at a 6.1% yield in 7.5 months, which works out to a 10.0% annualized yield.
Scenario #2: VFC climbs over $55 by August 18
If VFC climbs over $55 by August 18 my 100 shares will get sold (“called away”) at $55 per share.
Like “Scenario 1”, I get to keep the $336 in covered call income ($3.36 x 100 shares)… and I’ll also realize a $174 capital gain ($1.74 X 100) since I bought shares at $53.26 and will be selling at $55.
In this scenario, after commissions and fees I’ll be looking at a $491.10 profit.
From a percentage standpoint, this “10% Trade” will deliver an instant 6.3% yield for selling the covered call ($3.36 / $53.26) and a 3.3% capital gain ($1.74 / $53.26).
After subtracting out the commissions and fees, I’m looking at a 9.2% total return in 7.5 months.
That works out to a 15.0% annualized yield from VFC. Not bad, considering the stock’s “regular” yield is 3.2%.
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’ /]