I Just Made This “10% Trade” with Coca-Cola (KO)

[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]

Thanks to recent market volatility, we have an interesting income opportunity today with Coca-Cola (KO):

In short, while the company’s quarterly dividends equate to a 3.3% forward annual yield at current prices — which is already a solid yield for this Dividend Champion — a select “10% Trade” could deliver over 4x that income.

As a refresher, a “10% Trade” is a conservative income-oriented trade that involves generating a 10%-plus annualized yield by selling either a covered call or a cash-secured put on 1) a high-quality 2) dividend growth stock 3) trading at a reasonable price.

At current prices, Coca-Cola seems to meet all three criteria, making it an ideal candidate for one of these trades.

Here’s how I’m personally taking advantage of this opportunity…

Opportunity to Capture a 15.0% to 26.7% Annualized Yield from Coca-Cola
On Friday I bought 300 shares of KO for $40.42 per share and simultaneously “sold to open” three August 21, $41 covered calls for $0.73 per share.

There are likely two ways this trade will work out — and they both spell at least double-digit annualized yields on my purchase price…

Scenario #1: Coca-Cola stays under $41 by August 21
If Coca-Cola stays under $41 by August 21 I’ll get to keep my 300 shares.

In the process I’ll also have received $219.00 in covered call income ($0.73 x 300 shares).

The covered call income — known as a “premium” in options speak — was collected instantly on Friday. It was deposited in the account where I made the trade, which is my 401k retirement account.

At the end of the day, if “Scenario 1” plays out I’ll be looking at $208.67 in profit after commissions.

On a percentage basis, I received an instant 1.8% yield for selling the covered calls ($0.73 / $40.42).

When I subtract out the commissions I’m looking at a 1.7% yield in 42 days… which works out to a 15.0% annualized yield.

Scenario #2: Coca-Cola climbs over $41 by August 21
If Coca-Cola climbs over $41 by August 21 my 300 shares will get sold (“called away”) at $41 per share.

In “Scenario 2” — like “Scenario 1” — I get to keep the $219 in covered call income ($0.73 x 300 shares). I’ll also generate $174.00 in capital gains ($0.58 X 300).

In this scenario, after commissions I’ll be looking at a $372.34 profit.

From a percentage standpoint, this “10% Trade” will deliver and instant 1.8% yield for selling the covered calls ($0.73 / $40.42) and a 1.4% return from capital gains ($0.58 / $40.42).

After subtracting out the commissions, I’m looking at a 3.1% total return in just 42 days.

That works out to a 26.7% annualized yield from Coca-Cola.

Greg Patrick
TradesOfTheDay.com

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