On Friday, May 31, I bought 100 shares of Texas Instruments (TXN) for $105.60 per share and simultaneously “sold to open” one July 19, 2019 $110 call option for $2.40 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 TXN, I’m giving the buyer of the option the right, but not the obligation, to purchase my 100 shares at $110 per share (the “strike” price) anytime before July 19, 2019 (the contract “expiration” date).In exchange for that opportunity, the buyer of the option paid me $2.40 per share (the “premium”).
Because I collected immediate income when the trade opened, I immediately lowered my cost basis — before commissions and fees — from $105.60 per share to $103.20 per share. In other words, I bought the stock at a 2.3% discount to what it was trading at 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 TXN shares climb to $120, for example, I’ll still be forced to sell at “just” $110)… 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: TXN stays under $110 by July 19, 2019
If TXN stays under $110 by July 19, 2019, I’ll get to keep my 100 shares.
In the process, I’ll also have received $240 in call income ($2.40 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.
On a percentage basis, I received an instant 2.3% yield for selling the call ($2.40 / $105.60).
In the end, I’m looking at a 2.3% yield in 49 days… which works out to a 16.9% annualized yield.
Scenario #2: TXN climbs over $110 by July 19, 2019
If TXN climbs over $110 by July 19, 2019, my 100 shares will get sold (“called away”) at $110 per share.
In “Scenario 2″ — like “Scenario 1″ — I get to keep the $240 in call income ($2.40 x 100 shares). I’ll also generate a $440 gain ($4.40 X 100) because I bought at $105.60 and will be selling at $110.00.
In this scenario, I’ll be looking at a $680 profit.
From a percentage standpoint, this high-yield trade will deliver an instant 2.3% yield for selling the call ($2.40 / $105.60) and a 4.2% capital gain ($4.40 / $105.60).
At the end of the day, I’m looking at a 6.4% total return in 49 days.
That works out to a 48.0% annualized yield from TXN.
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 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.
[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]