I’m alerting you to a new stock purchase and high-yield trade I made yesterday with Leggett & Platt (LEG). For an in-depth analysis of this stock — and more timely ideas like it — be sure to check out the December 2020 edition of the Simply Safe Dividends newsletter.
In the first transaction, which took place in my buy-and-hold dividend growth portfolio, I purchased 235 shares of LEG for $43.58 per share. Thanks to the company’s growing dividend, this purchase should increase my annual passive income by at least $376. I plan to hold these shares for the long-term and selectively reinvest dividends.
In the second transaction, which took place in my 401(K) retirement account, I bought 300 shares of LEG at $43.53 per share and simultaneously “sold to open” three January 21, 2022 $45 call options for $5.58 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 these call options on LEG, I’m giving the buyer of the option the right, but not the obligation, to purchase my 300 shares at $45 per share (the “strike” price) anytime before January 21, 2022 (the contract “expiration” date).
In exchange for that opportunity, the buyer of the option paid me $5.58 per share (the “premium”).
Because I collected immediate income when the trade opened, I immediately lowered my cost basis — before commissions and fees — from $43.53 per share to $37.95 per share.
In other words, I bought the stock at a 13% discount to what it was selling for when I made the trade yesterday.
That’s a nice margin of safety.
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 LEG shares climb to $50, for example, I’ll be forced to sell at “just” $45)… 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: LEG stays under $45 by January 21, 2022
If LEG stays under $45 by January 21, 2022, I’ll get to keep my 300 shares.
In the process, I’ll also have received $1,674 in call income ($5.58 x 300 shares).
The call income — known as “premium” in the options world — was collected as soon as the order was filled yesterday.
It was deposited in the account where I made the trade, which is my 401k retirement account.
On a percentage basis, I received a 12.8% yield for selling the calls ($5.58 / $43.53) in 409 days.
That works out to an 11.4% annualized yield. Add in dividends, and that number climbs to 15.1%.
Scenario #2: LEG climbs over $45 by January 21, 2022
If LEG climbs over $45 by January 21, 2022, my 300 shares will get sold (“called away”) at $45 per share.
In “Scenario 2″ — like “Scenario 1″ — I get to keep the $1,674 in call income ($5.58 x 300 shares). I’ll also generate a $441 gain ($1.47 x 300) because I bought at $43.53 and will be selling at $45.
In this scenario, I’ll be looking at a $2,115 profit.
From a percentage standpoint, this high-yield trade would deliver an instant 12.8% yield for selling the calls ($5.58 / $43.53) and a 3.4% capital gain ($1.47 / $43.53).
At the end of the day, I’m looking at a 16.2% total return in 409 days.
That works out to a 14.5% annualized yield from LEG… from options income alone. Throw in another 3.7% from dividends, and the new annualized yield here is 18.2%.
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]