This morning I bought 100 shares of Discover Financial Services (DFS) for $69.93 per share and simultaneously “sold to open” one January 18, 2019 $70 call option for $4.43 per share.
This is my latest “high-yield trade” — a strategy designed to generate above average income from some of the best companies in the world.[hana-code-insert name=’adsense-article’ /]By selling the call option on DFS, I’m giving the buyer of the option the right, but not the obligation, to purchase my 100 shares at $70 per share (the “strike” price) anytime before January 18, 2019 (the contract “expiration” date).
In exchange for that opportunity, the buyer of the option paid me $4.43 per share (the “premium”).
Because I collected immediate income when the trade opened, I immediately lowered my cost basis — after commissions and fees — from $69.93 per share to $65.56 per share. In other words, I bought the stock at a 6.3% discount to its share price when I placed the trade today.
This is precisely what makes a “high-yield trade” safer than simply purchasing shares of the underlying stock the “traditional” way.
Yes, I’m limiting my potential upside (if DFS shares climb to $75 or $80, for example, I’ll still be forced to sell at “just” $70)… but I’m generating a decent-sized income in the process.
It’s a trade-off… and one I’m willing to make because this strategy, by its very nature — selling a call option instead of buying one — is designed to be conservative and to generate income.
There are likely two ways this new trade will work out — and they both spell outsized annualized yields.
Scenario #1: DFS stays under $70 by January 18, 2019
If DFS stays under $70 by January 18, 2019, I’ll get to keep my 100 shares.
In the process, I’ll also have received $443 in call income ($4.43 x 100 shares).[hana-code-insert name=’adsense-article’ /]The call income — known as a “premium” in the options world — was collected this morning.
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 $437.40 in profit after commissions.
On a percentage basis, I received an instant 6.3% yield for selling the call ($4.43 / $69.93).
When I subtract out the commissions I’m looking at a 6.3% yield in 186 days… which works out to a 12.3% annualized yield.
Scenario #2: DFS climbs over $70 by January 18, 2019
If DFS climbs over $70 by January 18, my 100 shares will get sold (“called away”) at $70 per share.
In “Scenario 2″ — like “Scenario 1″ — I get to keep the $443 in call income ($4.43 x 100 shares). I’ll also generate a $7 gain ($0.07 X 100) because I bought at $69.93 and will be selling at $70.
In this scenario, after commissions I’ll be looking at a $439.45 profit.
From a percentage standpoint, this high-yield trade will deliver an instant 6.3% yield for selling the call ($4.43 / $69.93) and a 0.1% gain ($0.07 / $69.93).
After subtracting out the commissions, I’m looking at a 6.3% total return in 186 days.
That works out to a 12.3% annualized yield from DFS.
P.S. The reason I’ve gone public with many of my real-life, real-money “High-Yield Trades” is so you can see for yourself how entirely possible it is to boost your annualized yield on high-quality dividend growth stocks. Just keep in mind that these trades aren’t intended to be specific recommendations for you as an individual. Everyone has different financial situations, risk tolerance, goals, time frames, etc.[hana-code-insert name=’MMPress’ /]