On Monday, September 17, I bought 100 shares of PepsiCo (PEP) for $114.89 per share and simultaneously “sold to open” one October 26, 2018 $115 call option for $2.44 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 PEP, I’m giving the buyer of the option the right, but not the obligation, to purchase my 100 shares at $115 per share (the “strike” price) anytime before October 26, 2018 (the contract “expiration” date).
In exchange for that opportunity, the buyer of the option paid me $2.44 per share (the “premium”).
Because I collected immediate income when the trade opened, I immediately lowered my cost basis — after commissions and fees — from $114.89 per share to $112.51 per share. In other words, I bought the stock at a 2.1% discount to what it was trading for at the time I placed my trade yesterday.
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 PEP shares climb to $120 or $125, for example, I’ll still be forced to sell at “just” $115)… but I’m still selling shares for more than what I bought them for AND generating 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: PEP stays under $115 by October 26, 2018
If PEP stays under $115 by October 26, 2018, I’ll get to keep my 100 shares.
In the process, I’ll also have received $244 in call income ($2.44 x 100 shares).[hana-code-insert name=’adsense-article’ /]The call income — known as a “premium” in the options world — was collected 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 $238.40 in profit after commissions.
On a percentage basis, I received an instant 2.1% yield for selling the call ($2.44 / $114.89).
When I subtract out the commissions I’m looking at a 2.1% yield in 39 days… which works out to a 19.4% annualized yield.
Scenario #2: PEP climbs over $115 by October 26, 2018
If PEP climbs over $115 by October 26, my 100 shares will get sold (“called away”) at $115 per share.
In “Scenario 2″ — like “Scenario 1″ — I get to keep the $244 in call income ($2.44 x 100 shares). I’ll also generate an $11 gain ($0.11 X 100) because I bought at $114.89 and will be selling at $115.
In this scenario, after commissions I’ll be looking at a $244.45 profit.
From a percentage standpoint, this high-yield trade will deliver an instant 2.1% yield for selling the call ($2.44 / $114.89) and a 0.1% gain ($0.11 / $114.95).
After subtracting out the commissions, I’m looking at a 2.1% total return in 39 days.
That works out to a 19.9% annualized yield from PEP.
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 easy 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.