On Friday, October 12, I bought 100 shares of Scotts Miracle-Gro (SMG) for $72.24 per share and simultaneously “sold to open” one December 20, 2019 $75 call option for $7.84 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 SMG, I’m giving the buyer of the option the right, but not the obligation, to purchase my 100 shares at $75 per share (the “strike” price) anytime before December 20, 2019 (the contract “expiration” date).
In exchange for that opportunity, the buyer of the option paid me $7.84 per share (the “premium”).
Because I collected immediate income when the trade opened, I immediately lowered my cost basis — after commissions and fees — from $72.24 per share to $64.40 per share. In other words, I bought the stock at a 10.9% discount to what it was trading for at the time I placed my trade Friday 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 SMG shares climb to $100, for example, I’ll still be forced to sell at “just” $75)… 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: SMG stays under $75 by December 20, 2019
If SMG stays under $75 by December 20, 2019, I’ll get to keep my 100 shares.
In the process, I’ll also have received $784 in call income ($7.84 x 100 shares).[hana-code-insert name=’adsense-article’ /]The call income — known as a “premium” in the options world — was collected Friday.
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 $778.36 in profit after commissions.
On a percentage basis, I received an instant 10.9% yield for selling the call ($7.84 / $72.24).
When I subtract out the commissions I’m looking at a 10.8% yield in 434 days… which works out to a 9.1% annualized yield.
Scenario #2: SMG climbs over $75 by December 20, 2019
If SMG climbs over $75 by December 20, 2019, my 100 shares will get sold (“called away”) at $75 per share.
In “Scenario 2″ — like “Scenario 1″ — I get to keep the $784 in call income ($7.84 x 100 shares). I’ll also generate a $276 gain ($2.76 X 100) because I bought at $72.24 and will be selling at $75.
In this scenario, after commissions I’ll be looking at a $1,049.41 profit.
From a percentage standpoint, this high-yield trade will deliver an instant 10.1% yield for selling the call ($7.84 / $72.24) and a 3.8% capital gain ($2.76 / $72.24).
After subtracting out the commissions, I’m looking at a 14.5% total return in 434 days.
That works out to a 12.2% annualized yield from SMG.
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.