I’m alerting you to a new high-yield trade I made this morning.
In short, I bought 100 shares of Cisco (CSCO) at $39.31 per share and simultaneously “sold to open” one January 15, 2021 $40 call option for $1.94 per share.
Here’s what my order screen looked like right before executing the trade.
This is my latest “high-yield trade” — a strategy designed to generate above average income from some of the best companies in the world.
By selling the call option on CSCO, I’m giving the buyer of the option the right, but not the obligation, to purchase my 100 shares at $40 per share (the “strike” price) anytime before January 15, 2021 (the contract “expiration” date).
In exchange for that opportunity, the buyer of the option paid me $1.94 per share (the “premium”).
Because I collected immediate income when the trade opened, I immediately lowered my cost basis — before commissions and fees — from $39.31 per share to $37.37 per share.
In other words, I bought the stock at a 5% discount to what it was selling for when I made the trade this morning.
That’s a nice margin of safety for this trade, especially considering there’s price support at $37.50.
The ability to immediately lower our cost-basis like 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 CSCO shares climb to $45, for example, I’ll be forced to sell at “just” $40)… but I’d still be 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: CSCO stays under $40 by January 15, 2021
If CSCO stays under $40 by January 15, I’ll get to keep my 100 shares.
In the process, I’ll also have received $194 in call income ($1.94 x 100 shares).
The call income — known as “premium” in the options world — was collected as soon as the order was filled this morning.
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 4.9% yield for selling the call ($1.94 / $39.31).
At the end of the day, I’m looking at a 4.9% yield in 87 days… which works out to a 20.7% annualized yield.
Scenario #2: CSCO climbs over $40 by January 15, 2021
If CSCO climbs over $40 by January 15, my 100 shares will get sold (“called away”) at $40 per share.
In “Scenario 2″ — like “Scenario 1″ — I get to keep the $194 in call income ($1.94 x 100 shares). I’ll also generate a $69 gain ($0.69 x 100) because I bought at $39.31 and will be selling at $40.
In this scenario, I’ll be looking at a $263 profit.
From a percentage standpoint, this high-yield trade would deliver an instant 4.9% yield for selling the call ($1.94 / $39.31) and a 1.8% capital gain ($0.69 / $39.31).
At the end of the day, I’m looking at a 6.7% total return in 87 days.
That works out to a 28.1% annualized yield from Cisco, a stock that has a forward dividend yield of around 3.7%.
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.