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 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.
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.[hana-code-insert name=’MMPress’ /]