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 CVS Health (CVS)…
Opportunity to Capture a 15.5% to 17.2% Annualized Yield from CVS
Yesterday I bought 100 shares of CVS for $79.79 per share and simultaneously “sold to open” one April 21, $80.00 covered call for $2.09 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: CVS stays under $80 by April 21
If CVS stays under $80 by April 21, I’ll get to keep my 100 shares.
In the process I’ll also have received $209 in covered call income ($2.09 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 $200.25 in profit after commissions and fees.
On a percentage basis, I received an instant 2.6% yield for selling the covered call ($2.09 / $79.79).
When I subtract out the commissions and fees I’m looking at a 2.5% yield in 59 days, which works out to a 15.5% annualized yield.
Scenario #2: CVS climbs over $80 by April 21
If CVS climbs over $80 by April 21 my 100 shares will get sold (“called away”) at $80 per share.
Like “Scenario 1”, I get to keep the $209 in covered call income ($2.09 x 100 shares)… and I’ll also realize a $21 capital gain ($0.21 x 100) since I bought shares at $79.79 and will be selling at $80.
In this scenario, after commissions and fees I’ll be looking at a $221.25 profit.
From a percentage standpoint, this “10% Trade” will deliver an instant 2.6% yield for selling the covered call ($2.09 / $79.79) and a 0.3% capital gain ($0.21 / $79.79).
After subtracting out the commissions and fees, I’m looking at a 2.8% total return in 59 days.
That works out to a 17.2% annualized yield from CVS. Not bad, considering the stock’s “regular” yield is 2.5%.
Greg Patrick
TradesOfTheDay.com
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.
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