A “10% Trade” can be a safe way to boost your income on some of the best companies in the world.
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 Williams-Sonoma (WSM)…
Opportunity to Capture an 11.2% to 14.2% Annualized Yield from WSM
Yesterday I bought 100 shares of WSM for $48.73 per share and simultaneously “sold to open” one January 19 2018, $50.00 covered call for $4.78 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: WSM stays under $50.00 by January 19, 2018
If WSM stays under $50.00 by January 19, I’ll get to keep my 100 shares.
In the process I’ll also have received $478 in covered call income ($4.78 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 $472.34 in profit after commissions and fees.
On a percentage basis, I received a 9.8% yield for selling the covered call ($4.78 / $48.73).
When I subtract out the commissions and fees I’m looking at a 9.7% yield in 317 days, which works out to an 11.2% annualized yield.
Scenario #2: WSM climbs over $50.00 by January 19, 2018
If WSM climbs over $50.00 by January 19, my 100 shares will get sold (“called away”) at $50.00 per share.
Like “Scenario 1”, I get to keep the $478 in covered call income ($4.78 x 100 shares)… and I’ll also realize a $127 capital gain ($1.27 x 100) since I bought shares at $48.73 and will be selling at $50.00.
In this scenario, after commissions and fees I’ll be looking at a $599.34 profit.
From a percentage standpoint, this “10% Trade” will deliver an instant 9.8% yield for selling the covered call ($4.78 / $48.73) and a 2.6% capital gain ($1.27 / $48.73).
After subtracting out the commissions and fees, I’m looking at a 12.3% total return in 317 days.
That works out to a 14.2% annualized yield from WSM. Not bad, considering the stock’s “regular” yield is 2.9%.
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.