With shares trading near my purchase price of $79.79, it seemed like a good time to make a new high-yield trade with CVS Health (CVS).
I made the trade yesterday, and it involved selling one October 27, $80.00 call for $1.73 per share.
I sold this call on the 100 shares that I had purchased for $79.79 per share during a previous high-yield trade.
I had then made another high-yield trade last month which just closed out on September 23 for a 16.3% annualized yield.
So with my latest high-yield trade I’m simply selling another round of calls on those same shares to generate even more income.
There are likely two ways this new trade will work out — and they both spell at least double-digit annualized yields on my purchase price…
Scenario #1: CVS stays under $80.00 by October 27
If CVS stays under $80.00 by October 27 I’ll get to keep my 100 shares.
In the process, I’ll also have received $173 in covered call income ($1.73 x 100 shares).
[hana-code-insert name=’adsense-article’ /]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 401k retirement account.
At the end of the day, if “Scenario 1″ plays out I’ll be looking at $167.34 in profit after commissions.
On a percentage basis, I received an instant 2.2% yield for selling the covered call ($1.73 / $79.79).
When I subtract out the commissions I’m looking at a 2.1% yield in 32 days… which works out to a 23.9% annualized yield.
Scenario #2: CVS climbs over $80 by October 27
If CVS climbs over $80.00 by October 27 my 100 shares will get sold (“called away”) at $80.00 per share.
In “Scenario 2″ — like “Scenario 1″ — I get to keep the $173 in covered call income ($1.73 x 100 shares). I’ll also generate a $21.00 in capital gains ($0.21 X 100) because I bought at $79.79 and will be selling at $80.00.
In this scenario, after commissions I’ll be looking at a $183.40 profit.
From a percentage standpoint, this high-yield trade will deliver an instant 2.2% yield for selling the covered call ($1.73 / $79.79) and a 0.3% gain ($0.21 / $79.79).
After subtracting out the commissions, I’m looking at a 2.3% total return in 32 days.
That works out to a 26.2% annualized yield from CVS.
Greg Patrick
TradesOfTheDay.com
P.S. I only made this trade because: 1) I want to own the underlying stock anyways 2) I believe it was trading at a reasonable price when I made the trade 3) I am comfortable owning it for the long-haul in case the price drops significantly below my cost basis by expiration and 4) I am comfortable letting it go if shares get called away. To be mindful of position sizing, except in rare cases, the value of this trade wouldn’t exceed 5% of my total portfolio value. In addition, to minimize taxes and tax paperwork, I made this trade in a retirement account.
[stextbox id=”info”]Please keep in mind that these “High-Yield Trade” alerts are for information purposes only. We’re not registered financial advisors and these aren’t specific trade recommendations for you as an individual. Each of our readers have different financial situations, risk tolerance, goals, time frames, etc. The ideas we publish are simply ideas that we feel fit our specific needs and that we’re personally making in our own portfolios. You should also be aware that some of the trade details (specifically stock prices and options premiums) are certain to change from the time we make our trade to the time you’re alerted about it. So please don’t attempt to make this “High-Yield Trade” yourself without first doing your own due diligence and research.[/stextbox] [hana-code-insert name=’MMPress’ /]