With shares trading near my purchase price of $69.93, yesterday seemed like a good time to make a new high-yield trade with Discover Financial Services (DFS).
For this new trade, I sold one October 18, 2019 $72.50 call option for $5.30 per share.
[hana-code-insert name=’adsense-article’ /]I sold this call on the 100 shares I originally purchased at $69.93 per share during a high-yield trade I made back in July 2018.That previous call option generated $443 in cash when I sold it and the contract expired in January 2019, so I’m still holding the shares and have been collecting dividend income in the process.
For my new high-yield trade, I simply sold another call option on those same 100 shares I originally purchased in July 2018.
Every time you’re able to sell an option like this, you generate additional income.
It’s a great way to turn a stock’s “normal” yield (if you rely on dividends alone) into a high-yielder.
There are likely two ways this new trade will work out — and they both spell outsized annualized yields.
Scenario #1: DFS stays under $72.50 by October 18, 2019
If DFS stays under $72.50 by October 18, I’ll get to keep my 100 shares.
In the process, I’ll also have received $530 in call income ($5.30 x 100 shares).
[hana-code-insert name=’adsense-article’ /]The call income — known as a “premium” in the options world — was collected immediately.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 $195 in profit (excluding any commissions and fees).
On a percentage basis, I’ll be banking a 7.6% yield ($5.30 / $69.93) in 221 days for selling the call. That works out to a 12.5% annualized yield.
Scenario #2: DFS climbs over $72.50 by October 18, 2019
If DFS climbs over $72.50 by October 18, my 100 shares will get sold (“called away”) at $72.50 per share.
In “Scenario 2″ — like “Scenario 1″ — I get to keep the $530 in call income ($5.30 x 100 shares). I’ll also generate $257 in capital gains ($2.57 X 100) because I bought at $69.93 and will be selling at $72.50.
In this scenario, after commissions I’ll be looking at a $787 profit.
From a percentage standpoint, this high-yield trade will deliver an instant 7.6% yield for selling the call ($5.30 / $69.93) and a 14.0% gain ($2.57 / $69.93).
Excluding any commissions and fees, I’m looking at a 11.3% total return in 221 days.
That works out to a 18.6% annualized yield from DFS.
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] [hana-code-insert name=’MMPress’ /]