Note from Daily Trade Alert: We recently 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.
Back in July, we introduced you to a high-yield trade with Cisco (CSCO) that was poised to deliver a 14.4% to 32.7% annualized yield.
If you made the trade, congratulations: the options contract you sold likely expired worthless on August 25. You booked a 14.4% annualized yield so far and you still own the shares.
Today, with the stock trading above your purchase price, it’s time to generate even more income by selling another round of calls.
If you previously bought under $32 per share (which you should have), then consider selling the $32 strike price with an expiration date of November 17, 2017.
That will give you outsized income today, set you up for a dividend payment, and still ensure a capital gain if shares get called away at expiration.
If you’re just joining us, welcome to High-Yield Trade of the Week, where each week we highlight an opportunity to make safe, above average income with some of the best companies in the world.
Our high-yield trading strategy is simple: We sell a cash-secured put or a covered call on a high-quality dividend growth stock when it appears to be trading at a reasonable price.
When executed properly, this kind of trade can regularly pay 10%-plus annualized yields from stocks like Disney (DIS), Starbucks (SBUX), Microsoft (MSFT), Lowe’s (LOW) and more.
Today, we’re featuring a new high-yield trade with shares of Cisco (CSCO).
In fact, I just made this trade in my retirement account near opening bell this morning.
While there’s no guarantee we’ll make money this time around with Cisco, I like the setup here.
In short, Cisco is a high-quality dividend grower that appears to be selling at a reasonable price.
As Brian Bollinger recently pointed out, the company has the potential to deliver annual total returns between 7% and 9% over the long-term.
That’s compelling in itself, but by making a high-yield trade here we have a relatively low-risk opportunity to generate safe, high income that’s in the double-digits.
Here’s what we’re looking at as we go to press, and the same trade setup I just made in my own retirement account just minutes ago…
High-Yield Trade of the Week:
Sell the September 29, 2017, $32.50 call on shares of Cisco (CSCO)
As we go to press, CSCO is selling for $32.12 per share and the September 29 $32.50 calls are going for about $0.31 per share.
Our trade would involve buying 400 shares of CSCO and simultaneously selling four of those calls.
By selling call options, we would be giving the buyer of the option the right, but not the obligation, to purchase our 400 shares at $32.50 per share (the “strike” price) anytime before September 29 (the contract “expiration” date).
In exchange for that opportunity, the buyer of the option would be paying us $0.31 per share (the “premium”) per option.
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: CSCO stays under $32.50 by September 29
If CSCO stays under $32.50 by September 29, our options contract would expire and we’d get to keep our 400 shares.
In the process, we’d receive $124 in premium ($0.31 x 400 shares).
That income would be collected instantly, when the trade opens.
Excluding commissions, if “Scenario 1″ plays out, we’d receive a 1.0% yield for selling the covered calls ($0.31 / $32.12) in 28 days. That works out to an 12.6% annualized yield.
Scenario #2: CSCO climbs over $32.50 by September 29
If CSCO climbs over $32.50 by September 29, our 400 shares will get sold (“called away”) at $32.50 per share.
In “Scenario 2” — like “Scenario 1” — we’d collect an instant $124 in premium ($0.31 x 400 shares) when the trade opens. We’d also generate $152 in capital gains ($0.38 x 400) when the trade closes because we’d be buying 400 shares at $32.12 and selling them at $32.50.
In this scenario, excluding any commissions, we’d be looking at a $276 profit.
From a percentage standpoint, this scenario would deliver an instant 1.0% yield for selling the covered calls ($0.31 / $32.12) and a 1.2% return from capital gains ($0.38/ $32.12).
At the end of the day, we’d be looking at a 2.1% total return in 28 days, which works out to a 28.0% annualized yield from CSCO.
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 $31.81 ($32.12 – $0.31) 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 Cisco (CSCO) for this trade. For every 100 shares we’d buy, we’d “Sell to Open” one options contract using a limit order. I just made this trade with four options contracts, so the numbers in this article reflect that. Accounting for the $124 in premium we’d collect for selling four contracts, that would require a minimum investment of $12,724.
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.