I’m alerting you to a new high-yield trade I made on June 17, 2021 with Merck (MRK).
In short, I bought 100 shares of MRK at $77.34 per share and simultaneously “sold to open” one June 17, 2022 $77.50 call option for $5.64 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 MRK, I’m giving the buyer of the option the right, but not the obligation, to purchase my 100 shares at $77.50 per share (the “strike” price) anytime before June 17, 2022 (the contract “expiration” date).
In exchange for that opportunity, the buyer of the option paid me $5.64 per share (the “premium”).
Because I collected immediate income when the trade opened, I immediately lowered my cost basis — before commissions and fees — from $77.34 per share to $71.70 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 MRK shares climb to $85, for example, I’ll be forced to sell at “just” $77.50)… 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: MRK stays under $77.50 by June 17, 2022
If MRK stays under $77.50 by June 17, 2022, I’ll get to keep my 100 shares.
In the process, I’ll also have received $564 in call income ($5.64 x 100 shares).
The call income — known as “premium” in the options world — was collected as soon as the order was filled on June 17.
It was deposited in the account where I made the trade, which is my 401k retirement account.
On a percentage basis, I received a 7.3% yield for selling the call ($5.64 / $77.34) in exactly 365 days.
That works out to a 7.3% yield from options income alone. I’ll also collect dividends, which should boost the annual yield to about 10.7%.
Scenario #2: MRK climbs over $77.50 by June 21, 2022
If MRK climbs over $77.50 by June 17, 2022, my 100 shares will get sold (“called away”) at $77.50 per share.
In “Scenario 2″ — like “Scenario 1″ — I get to keep the $564 in call income ($5.64 x 100 shares). I’ll also generate a $16 capital gain ($0.16 x 100) because I bought at $77.34 and will be selling at $77.50.
In this scenario I’ll be looking at a total profit of $580, not including any dividends.
From a percentage standpoint, this high-yield trade would deliver an instant 7.3% yield for selling the call ($5.64 / $77.34) and a 0.2% capital gain ($0.16 / $77.34).
At the end of the day, I’d be looking at a 7.5% total return in 365 days. Add in the anticipated dividends over the next year and this MRK trade would generate a 10.9% yield. That’s about 3X the income I would have collected from the stock if I were to rely on dividends alone.
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]