I Just Made This “10% Trade” with Microsoft (MSFT)

[stextbox id=”info”]Please keep in mind that these “10% 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 “10% Trade” yourself without first doing your own due diligence and research.[/stextbox]

While I already own Microsoft (MSFT) in my long-term dividend growth portfolio — and plan on holding it for the long-haul — I’m always open to potential “10% Trade” opportunities with the stock that could safely boost my income.

With this in mind, Microsoft’s post-earnings pullback has created a compelling new “10% Trade” opportunity which I’m taking advantage of right now.

The trade allows me to generate a 10%-plus annualized yield from one of the highest-quality companies in the world, and I may not even need to buy its stock (although I’ll be happy if I do).

Here’s how it works…

"10% Trade" with Microsoft (MSFT)

At the time I made my trade yesterday, Microsoft was selling for $49.98 per share and the July 15, $48.00 puts were going for $1.18 per share.

My “10% Trade” involved selling one of these puts… and there are only two possible ways this trade will work out.

On one hand, I’d get to generate an 11.2% annualized yield from Microsoft without even owning the stock. On the other hand, I’d get paid about 2% in income to buy Microsoft at a 4% discount.

That said, I’ll be happy however this trade works out.

Let’s take a closer look at each scenario…

Scenario 1: MSFT falls below $48.00 by July 15
If Microsoft falls below $48.00 by July 15, I’ll be obligated to buy 100 shares at $48.00 per share.

That’s a 4% discount to the $49.98 price the stock was trading for when I sold the put yesterday… but more importantly, I’m getting paid about 2% in income for agreeing to buy the stock at that price.

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You see, in exchange for my agreement, I collected an instant $118 (100 shares X $1.18 per share) before commissions.

[hana-code-insert name=’adsense-article’ /]This money was deposited into my account immediately.

One neat thing about the trade is that since I made it my Roth IRA, it essentially served as a legal “backdoor” way to contribute extra money to that account even though I’m no longer eligible to. I’ve explained how this works before.

Taking this income into consideration – and subtracting out the commissions – my cost-basis will actually drop to $46.99 per share.

That’s a 6.0% discount to the $49.98 share price that Microsoft was selling for at the time I made this trade, and a roughly 16% discount to what it was trading for just a couple weeks ago. At the same time, the trade is giving me a “backdoor” way to contribute some extra cash to my Roth IRA.

Scenario 2: MSFT stays above $48.00 by July 15
If Microsoft stays above $48.00 by July 15, the contract expires worthless and I get to keep the $118.00 in income (before commissions).

After $8.75 in commissions, this works out to a 2.3% return on what my purchase obligation would have been ($1.18 / $48.00) in 74 days.

That may not sound like a big deal, but if I can repeat this trade over the period of a year I could generate an 11.2% yield from Microsoft without even buying shares.

I’ll continue to keep my eyes open for safe, income-generating opportunities like this one — especially during earnings season, when high-quality dividend growers can temporarily go on sale and when volatility can send options premiums soaring.

Greg Patrick
TradesOfTheDay.com

P.S. I realize the typical financial advisor may think it’s crazy to trade individual stocks in a retirement account… no matter how safe the stocks may appear. And in many cases they’re probably right — especially if you’re not properly diversified and you’re heavily dependent on the income from this account. So I urge you not to blindly follow my lead today without first speaking to a professional advisor or doing your own due diligence and research. In addition, I’m not a tax advisor and I don’t claim to be… so please consult a professional for any tax related questions you have.

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