A “10% Trade” can be a great way to generate extra income from a stock you already own — even if the stock you own is selling off.
As a reminder, a “10% Trade” involves selling either a covered call or a cash-secured put on shares of a high-quality dividend growth stock.
These are conservative, income-oriented trades that typically last just six to 10 weeks… but the beauty is, when you add up all the income you collect from selling the call or put, you could generate annual yields of 10%-plus.
Here’s a specific example of what I’m talking about…
Back on May 29, as a part of a “10% Trade”, I bought 100 shares of Apple (AAPL) for $130 per share.
The stock has gone down… and then up… and then down again since then. As I write this morning, shares are pulling back on a disappointing sales outlook for Q4.
[hana-code-insert name=’adsense-article’ /]However, with just two “10% Trades” — the initial one I made on May 29 and the one I just made yesterday — I’ve collected a total of $5.48 in options income ($2.14 per share for the put I sold on May 29 and $3.34 per share for the call I just sold yesterday, which I will detail below).That works out to a 4.2% yield on my $130 per share purchase price in about two months.
At this pace, and assuming Apple recovers as it has in the past, I should be able to generate a 10% annual yield from my shares.
With this in mind, here are the details behind that latest “10% Trade” with Apple…
Opportunity to Capture a 91.4% to 117.2% Annualized Yield from AAPL
Yesterday, I sold one July 31, $131 covered call for $3.34 per share. I sold this call on the 100 shares of AAPL that I purchased at $130.00 per share through the trade I initiated on May 29 that I mentioned above.
There are two likely ways this trade will work out… and they both offer the potential to generate at least 10% annualized income on my original purchase price.
Scenario #1: Apple stays under $131.00 by July 31
If Apple stays under $131.00 by July 31, I’ll get to keep my 100 shares.
In the process I’ll also have received $334 in covered call income ($3.34 x 100 shares), before commissions and fees.
The covered call income — known as a “premium” in the options world — was collected instantly yesterday. It was deposited in my retirement account.
At the end of the day, if “Scenario 1” plays out I’ll be looking at $325.30 in profit after commissions.
On a percentage basis, I received an instant 2.6% yield for selling the covered call ($3.34 / $130).
When I subtract out the commissions I’m looking at a 2.5% yield in 10 days… which works out to a 91.4% annualized yield.
Scenario #2: Apple climbs over $131.00 by July 31
If Apple climbs over $131.00 by July 31 my 100 shares will get sold (“called away”) at $131.00 per share.
In this scenario, not only will I get to keep the $334 in covered call income ($3.34 x 100 shares), but I’ll also realize $100 in capital gains (($131.00 – $130.00) x 100 shares) in the process. Remember, I bought the stock at $130.00 per share and I’d be selling it at $131.00 per share.
In this scenario, after commissions I’ll be looking at a profit of $417.11.
From a percentage standpoint, this “10% Trade” will deliver an instant 2.6% yield for selling the covered call ($3.34 / $130.00) and a 0.8% return from a capital gain ($1.00 / $130.00).
After subtracting out the commissions, I’m looking at a 3.2% total return in 10 days, which works out to a 117.2% annualized yield from Apple.
Greg Patrick
TradesOfTheDay.com
P.S. The reason I’ve gone public with many of my real-life, real-money “10% Trades” is so you can see for yourself how entirely possible 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.
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