Note from Daily Trade Alert: A few weeks ago we launched a new regular column here at Daily Trade Alert called High-Yield Trade of the Week. The goal of this column is to show our readers how to safely boost their income from some of the best stocks in the world. It’s our sincere hope that you benefit from this new service.
Over the years, I’ve noticed that different investment newsletters have different policies in terms of what their analysts are “allowed” to recommend.
For example, some publishers prohibit their analysts from recommending any stock they either own or plan on buying in the very near future.
I think they have good intentions with this policy, as there could be a conflict of interest if you have an analyst trying to “pump and dump” a penny stock for their own profit at the expense of their readers. This is actually why we don’t cover penny stocks at DTA.
The problem with this policy is, these analysts likely aren’t telling us about their best ideas — the ones they’re investing their own money in.
That said, I’ve always been a fan of those analysts who put their money where their mouths are.
Even better are those who give us inside looks at their real-life, real-money stock portfolios.
Dave Van Knapp and Jason Fieber are perfect examples of this. These guys analyze a stock, like it enough to buy it for their own portfolio, and then tell our readers about the opportunity.
As long as they’re not recommending penny stocks (which can be easily manipulated by a bullish recommendation), I don’t see any problem with this.
In fact, I find it incredibly reassuring to know the analysts I’m following have enough conviction about their research to go out and buy the stock themselves.
With all of this in mind, this week’s High-Yield Trade of the Week is a trade I actually just made in my own retirement portfolio a couple days ago. I wrote about the details yesterday in our sister newsletter, Trades Of The Day.
Since share prices and options premiums are constantly changing, the numbers below are current at the time this alert is being published this morning.
As we go to press, here’s the opportunity we’re looking at…
If you’re in it for the long-haul, Starbucks (SBUX) looks quite attractive today.
In short, it’s a high-quality dividend growth stock that’s potentially 17% undervalued right now.
As such, I think long-term investors will likely do well buying at today’s market price, holding for the long-term, and reinvesting dividends along the way (either selectively or automatically).
Alternatively, if you want to boost your income (Starbucks yields just 1.9%), you may want to consider making a high-yield trade like I just did.
At current prices, you could generate an annualized yield of 8.3% to 25.9%.
It’s a strategy that I personally use in my retirement accounts (401k and Roth IRA), and one that’s engineered to boost our annualized income from some of the best companies in the world.
In short, the strategy I’m talking about involves selling a cash-secured put or a covered call on a high-quality dividend growth stock when it’s trading at a reasonable price (which is typically at or below fair value).
Here’s how it would work with Starbucks today…
High-Yield Trade of the Week:
Sell the October 20, 2017, $55.00 calls on shares of Starbucks (SBUX)
As we go to press, SBUX is selling for $53.21 per share and the October 20 $55.00 calls are going for about $0.85 per share.
Our trade would involve buying 100 shares of SBUX and simultaneously selling one of those calls.
By selling a call option, we would be giving the buyer of the option the right, but not the obligation, to purchase our 100 shares at $55.00 per share (the “strike” price) anytime before October 20 (the contract “expiration” date).
In exchange for that opportunity, the buyer of the option would be paying us $0.85 per share (the “premium”).
Because we’re collecting immediate income when we open the trade, we’re lowering our cost basis on the shares we’re buying.
That’s what makes this trade safer than simply purchasing shares of the underlying stock the “traditional” way.
With all of this in mind, there are two likely ways our High-Yield Trade of the Week would work out, and they both offer significantly higher income than what we’d collect if we relied on the stock’s dividends alone.
To be conservative, we don’t include any dividends in our calculations for either of the following scenarios. The annualized yields are generated from options premium and applicable capital gains alone. So any dividends collected are just “bonus” that will boost our overall annualized yields even further. Let’s take a closer look at each scenario…
Scenario #1: SBUX stays under $55.00 by October 20
If SBUX stays under $55.00 by October 20, our options contract would expire and we’d get to keep our 100 shares.
In the process, we’d receive $85 in premium ($0.85 x 100 shares).
That income would be collected instantly, when the trade opens.
Excluding any commissions, if “Scenario 1″ plays out, we’d receive a 1.6% yield for selling the covered call ($0.85 / $53.21) in 70 days. That works out to an 8.3% annualized yield.
Scenario #2: SBUX climbs over $55.00 by October 20
If SBUX climbs over $55.00 by October 20, our 100 shares will get sold (“called away”) at $55.00 per share.
In “Scenario 2” — like “Scenario 1” — we’d collect an instant $85 in premium ($0.85 x 100 shares) when the trade opens. We’d also generate $179 in capital gains ($1.79 x 100) when the trade closes because we’d be buying 100 shares at $53.21 and selling them at $55.00.
In this scenario, excluding any commissions, we’d be looking at a $264 profit.
From a percentage standpoint, this scenario would deliver an instant 1.6% yield for selling the covered call ($0.85 / $53.21) and a 3.4% return from capital gains ($1.79/ $53.21).
At the end of the day, we’d be looking at a 5.0% total return in 70 days, which works out to a 25.9% annualized yield from SBUX.
Here’s how we’d make the trade…
We’d place a “Buy-Write” options order with a Net Debit price of as close to $52.36 ($53.21 – $0.85) as we can get — the lower the better. Options contracts work in 100-share blocks, so we’d have to buy at least 100 shares of Starbucks (SBUX) for this trade. For every 100 shares we’d buy, we’d “Sell to Open” one options contract using a limit order. Accounting for the $85 in premium we’d collect, that would require a minimum investment of $5,236.
Good Trading!
Greg Patrick
P.S. We’d only make this trade if: 1) we wanted to own the underlying stock anyways 2) we believed it was trading at a reasonable price 3) we were comfortable owning it for the long-haul in case the price drops significantly below our cost basis by expiration and 4) we were comfortable letting it go if shares get called away. To be mindful of position sizing, except in rare cases, the value of this trade wouldn’t exceed 5% of our total portfolio value. In addition, to minimize taxes and tax paperwork, we would most likely make this trade in a retirement account, such as an IRA or 401(k).
Please note: We’re not registered financial advisors and these aren’t specific recommendations for you as an individual. Each of our readers have different financial situations, risk tolerance, goals, time frames, etc. 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 do our research, to the time we publish our article, to the time you’re alerted about it. So please don’t attempt to make this trade yourself without first doing your own due diligence and research.