On Monday, August 27, I bought 100 shares of Nvidia (NVDA) for $274.02 per share and simultaneously “sold to open” one June 21, 2019 $275 call option for $34.66 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.
By selling the call option on NVDA, I’m giving the buyer of the option the right, but not the obligation, to purchase my 100 shares at $275 per share (the “strike” price) anytime before June 21, 2019 (the contract “expiration” date).
In exchange for that opportunity, the buyer of the option paid me $34.66 per share (the “premium”).
Because I collected immediate income when the trade opened, I immediately lowered my cost basis — after commissions and fees — from $274.02 per share to $239.41 per share. In other words, I bought the stock at a 12.6% discount to what it was trading for at the time I placed my trade this morning.
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 NVDA shares climb to $280 or $290, for example, I’ll still be forced to sell at “just” $275)… but I’m still generating a capital gain AND high 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 double-digit annualized yields.
Scenario #1: NVDA stays under $275 by June 21, 2019
If NVDA stays under $275 by June 21, 2019, I’ll get to keep my 100 shares.
In the process, I’ll also have received $3,466 in call income ($34.66 x 100 shares).
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 $3,460.35 in profit after commissions.
On a percentage basis, I received an instant 12.6% yield for selling the call ($34.66 / $274.02).
When I subtract out the commissions I’m looking at a 12.6% yield in 298 days… which works out to a 15.5% annualized yield.
Scenario #2: NVDA climbs over $275 by June 21, 2019
If NVDA climbs over $275 by June 21, my 100 shares will get sold (“called away”) at $275 per share.
In “Scenario 2″ — like “Scenario 1″ — I get to keep the $3,466 in call income ($34.66 x 100 shares). I’ll also generate a $98 gain ($0.98 X 100) because I bought at $274.02 and will be selling at $275.
In this scenario, after commissions I’ll be looking at a $3,553.63 profit.
From a percentage standpoint, this high-yield trade will deliver an instant 12.6% yield for selling the call ($34.66 / $274.02) and a 0.4% gain ($0.98 / $274.02).
After subtracting out the commissions, I’m looking at a 13.0% total return in 298 days.
That works out to a 15.9% annualized yield from NVDA.
Greg Patrick
TradesOfTheDay.com
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.
[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]