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 Nike (NKE), this week’s Undervalued Dividend Growth Stock of the Week…
Opportunity to Capture a 20.6% to 42.8% Annualized Yield from NKE
Yesterday I bought 200 shares of NKE for $52.74 per share and simultaneously “sold to open” two August 4 2017, $54.00 covered calls for $1.16 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: NKE stays under $54.00 by August 4
If NKE stays under $54.00 by August 4, I’ll get to keep my 200 shares.
In the process I’ll also have received $232 in call income ($1.16 x 200 shares).
The 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 $225.65 in profit after commissions and fees.
On a percentage basis, I received a 2.2% yield for selling the calls ($1.16 / $52.74).
When I subtract out the commissions and fees I’m looking at a 2.1% yield in 38 days, which works out to a 20.6% annualized yield.
Scenario #2: NKE climbs over $54.00 by August 4
If NKE climbs over $54.00 by August 4, my 200 shares will get sold (“called away”) at $54.00 per share.
Like “Scenario 1”, I get to keep the $232 in call income ($1.16 x 200 shares). I’ll also generate $252 in capital gains ($1.26 x 200) since I bought at $52.74 and will be selling at $54.00.
In this scenario, after commissions and fees I’ll be looking at a $469.46 profit.
From a percentage standpoint, this “10% Trade” will deliver an instant 2.2% yield for selling the calls ($1.16 / $52.74) and a 2.4% gain ($1.26 / $52.74).
After subtracting out the commissions and fees, I’m looking at a 4.5% total return in 38 days.
That works out to a 42.8% annualized yield from NKE. Not bad, considering the stock’s “regular” yield is just 1.4%.
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’ /]