On Monday, June 10, I bought 100 shares of Lowe’s (LOW) for $97.67 per share and simultaneously “sold to open” one October 18, 2019 $100 call option for $5.12 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.
In exchange for that opportunity, the buyer of the option paid me $5.12 per share (the “premium”).
Because I collected immediate income when the trade opened, I immediately lowered my cost basis — before commissions and fees — from $97.67 per share to $92.55 per share. In other words, I bought the stock at a 5.2% discount to what it was trading at yesterday 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 LOW shares climb to $110, for example, I’ll still be forced to sell at “just” $100)… 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: LOW stays under $100 by October 18
If LOW stays under $100 by October 18, I’ll get to keep my 100 shares.
In the process, I’ll also have received $512 in call income ($5.12 x 100 shares).
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 5.2% yield for selling the call ($5.12 / $97.67).
In the end, I’m looking at a 5.2% yield in 129 days… which works out to a 14.8% annualized yield.
Scenario #2: LOW climbs over $100 by October 18
If LOW climbs over $100 by October 18, my 100 shares will get sold (“called away”) at $100 per share.
In “Scenario 2″ — like “Scenario 1″ — I get to keep the $512 in call income ($5.12 x 100 shares). I’ll also generate a $233 gain ($2.33 X 100) because I bought at $97.67 and will be selling at $100.00.
In this scenario, I’ll be looking at a $745 profit.
From a percentage standpoint, this high-yield trade will deliver an instant 5.2% yield for selling the call ($5.12 / $97.67) and a 2.4% capital gain ($2.33 / $97.67).
At the end of the day, I’m looking at a 7.6% total return in 129 days.
That works out to a 21.6% annualized yield from LOW.
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.