I’m alerting you to a high-yield trade I made with Microsoft (MSFT) last week. It’s the same MSFT trade I talk about in this YouTube video.
At the time I made my trade on May 3, Microsoft was selling for around $252.15 per share and the June 18, 2021, $250 puts were going for around $6.70 per share.
My trade involved selling one of these puts and there are two probable ways this trade will work out…
Scenario 1: Microsoft falls below $250 by June 18, 2021
If MSFT falls below $250 by June 18, the option may get exercised. If that happens, I will be obligated to buy 100 shares at $250 per share.
In exchange for this agreement, I was paid an instant $670 (100 shares X $6.70 per share).
This money was immediately deposited into my 401(k) retirement account, where I made the trade.
Taking this income into consideration, my cost-basis would drop to $243.30 per share.
That’s a 3.5% discount to the $252.15 share price that Microsoft was selling for at the time I made this trade.
Scenario 2: Microsoft stays above $250 by June 18, 2021
If MSFT stays above $250 by June 18, the contract expires worthless and I get to keep the $670 in income.
This works out to a 2.7% return on what my purchase obligation would have been ($6.70 / $250) in 46 days.
If I can repeat these results over the period of a year I could generate an 21.3% yield from Microsoft without even buying shares. Selling covered options like this is one of my favorite ways to generate “instant income” from high-quality dividend growth stocks.
P.S. When it comes to selling puts, I’ve developed a few rules that fit my portfolio objectives. I only sell a put option if:
- I want to own the underlying stock anyways
- I’ll be buying the stock at a reasonable price (which is typically fair value or better)
- The strike price of the option I’m selling is At-The-Money (ATM) or Out-of-The-Money (OTM)
- I’m comfortable owning the stock for the long-haul in case the price drops significantly below my strike price
- I’m comfortable “letting the stock get away from me” if I don’t get “put” shares and the stock takes off
- My position-sizing makes sense if I’m “put” the shares
- I can make the trade in a retirement account, such as an IRA or 401(k) to minimize taxes and tax paperwork.
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