I’m alerting you to a new high-yield trade I made this past Thursday with Kroger (KR).
In short, I bought 100 shares of KR at $36.08 per share and simultaneously “sold to open” one January 21, 2022 $37 call option for $2.88 per share.
Here’s what the order looked like in my account after it was fulfilled…
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 KR, I’m giving the buyer of the option the right, but not the obligation, to purchase my 100 shares at $37 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 $2.88 per share (the “premium”).
Because I collected immediate income when the trade opened, I immediately lowered my cost basis — before commissions and fees — from $36.08 per share to $33.20 per share.
The ability to immediately lower 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 KR shares climb to $40, for example, I’ll be forced to sell at “just” $37)… 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: KR stays under $37 by January 21, 2022
If KR stays under $37 by January 21, 2022, I’ll get to keep my 100 shares.
In the process, I’ll also have received $288 in call income ($2.88 x 100 shares).
The call income — known as “premium” in the options world — was collected as soon as the order was filled this past Thursday.
It was deposited in the account where I made the trade, which is my 401k retirement account.
On a percentage basis, I received an 8.0% yield for selling the call ($2.88 / $36.08) in 246 days.
That works out to an 11.9% annualized yield from options income alone. I’ll also collect dividends, which will boost the annualized yield even further.
Scenario #2: KR climbs over $37 by January 21, 2022
If KR climbs over $37 by January 21, 2022, my 100 shares will get sold (“called away”) at $37 per share.
In “Scenario 2″ — like “Scenario 1″ — I get to keep the $288 in call income ($2.88 x 100 shares). I’ll also generate a $92 capital gain ($0.92 x 100) because I bought at $36.08 and will be selling at $37.
In this scenario I’ll be looking at a total profit of $380, not including any dividends.
From a percentage standpoint, this high-yield trade would deliver an instant 8.0% yield for selling the call ($2.88 / $36.08) and a 2.5% capital gain ($0.92 / $36.08).
At the end of the day, I’m looking at a 10.5% total return in 246 days.
That works out to a 15.6% annualized yield from KR. This yield will get boosted even further as dividends come in.
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]