On Monday, September 24, I bought 200 shares of Intel (INTC) for $46.71 per share and simultaneously “sold to open” two October 26, 2018 $47 call options for $1.47 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 options on INTC, I’m giving the buyer of the options the right, but not the obligation, to purchase my 200 shares at $47 per share (the “strike” price) anytime before October 26, 2018 (the contract “expiration” date).
In exchange for that opportunity, the buyer of the options paid me $1.47 per share (the “premium”).
Because I collected immediate income when the trade opened, I immediately lowered my cost basis — after commissions and fees — from $46.71 per share to $45.27 per share. In other words, I bought the stock at a 3.1% 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 INTC shares climb to $50 or $55, for example, I’ll still be forced to sell at “just” $47)… 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: INTC stays under $47 by October 26, 2018
If INTC stays under $47 by October 26, 2018, I’ll get to keep my 200 shares.
In the process, I’ll also have received $294 in call income ($1.47 x 200 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 $287.62 in profit after commissions.
On a percentage basis, I received an instant 3.1% yield for selling the calls ($1.47 / $46.71).
When I subtract out the commissions I’m looking at a 3.1% yield in 32 days… which works out to a 35.1% annualized yield.
Scenario #2: INTC climbs over $47 by October 26, 2018
If INTC climbs over $47 by October 26, my 200 shares will get sold (“called away”) at $47 per share.
In “Scenario 2″ — like “Scenario 1″ — I get to keep the $294 in call income ($1.47 x 200 shares). I’ll also generate an $58 gain ($0.29 X 200) because I bought at $46.71 and will be selling at $47.
In this scenario, after commissions I’ll be looking at a $340.67 profit.
From a percentage standpoint, this high-yield trade will deliver an instant 3.1% yield for selling the calls ($1.47 / $46.71) and a 0.6% gain ($0.29 / $46.71).
After subtracting out the commissions, I’m looking at a 3.6% total return in 32 days.
That works out to a 41.6% annualized yield from INTC.
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.