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 Exxon Mobil (XOM)…
Opportunity to Capture an 11.3% to 19.1% Annualized Yield from XOM
On Friday I bought 100 shares of XOM for $81.53 per share and simultaneously “sold to open” one April 21, $82.50 covered call for $1.50 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: XOM stays under $82.50 by April 21
If XOM stays under $82.50 by April 21, I’ll get to keep my 100 shares.
In the process I’ll also have received $150 in covered call income ($1.50 x 100 shares).
The covered call income — known as a “premium” in the options world — was collected instantly 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 $141.25 in profit after commissions and fees.
On a percentage basis, I received a 1.8% yield for selling the covered call ($1.50 / $81.53).
When I subtract out the commissions and fees I’m looking at a 1.7% yield in 56 days, which works out to an 11.3% annualized yield.
Scenario #2: XOM climbs over $82.50 by April 21
If XOM climbs over $82.50 by April 21 my 100 shares will get sold (“called away”) at $82.50 per share.
Like “Scenario 1”, I get to keep the $150 in covered call income ($1.50 x 100 shares)… and I’ll also realize a $97 capital gain ($0.97 x 100) since I bought shares at $81.53 and will be selling at $82.50.
In this scenario, after commissions and fees I’ll be looking at a $238.25 profit.
From a percentage standpoint, this “10% Trade” will deliver an instant 1.8% yield for selling the covered calls ($1.50 / $81.53) and a 1.2% capital gain ($0.97 / $81.53).
After subtracting out the commissions and fees, I’m looking at a 2.9% total return in 56 days.
That works out to a 19.1% annualized yield from XOM. Not bad, considering the stock’s “regular” yield is 3.7%.
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’ /]