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 September, I introduced you to a high-yield trade with J.M. Smucker Company (SJM) that was poised to deliver a 13.4% to 25.9% annualized yield.
If you made the trade, congratulations: the options contract you sold expired worthless on October 20. You booked a 13.4% annualized yield on that trade 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 $110 per share (which you should have), then consider selling the $110 strike price with an expiration date of January 19, 2018.
That will give you outsized income today and still ensure a capital gain if shares get called away at expiration.
I just made this trade in my own retirement portfolio this morning. It’s poised to generate an annualized yield of 36.1% to 43.4%. I’ll share the details of my specific trade in tomorrow’s issue of Trades Of The Day.
For those who are looking to initiate a new high-yield trade with Smucker’s today, which still appears undervalued at current prices (even after a post-earnings pop), here’s what we’re looking at as we go to press…
High-Yield Trade of the Week:
Sell the January 19, 2018 $115 call on shares of Smucker’s (SJM)
As we go to press, SJM is selling for $115.31 per share and the January 19, 2018 $115 calls are going for about $3.25 per share.
Our trade would involve buying 100 shares of SJM 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 $115 per share (the “strike” price) anytime before January 19, 2018 (the contract “expiration” date).
In exchange for that opportunity, the buyer of the option would be paying us $3.25 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: SJM stays under $115 by January 19, 2018
If SJM stays under $115 by January 19, our options contract will expire and we’ll get to keep our 100 shares.
In the process, we’ll receive $325 in premium ($3.25 x 100 shares).
That income will be collected instantly, when the trade opens.
Excluding commissions, if “Scenario 1″ plays out, we’d receive a 2.8% yield for selling the covered call ($3.25 / $115.31) in 60 days. That works out to a 17.2% annualized yield.
Scenario #2: SJM climbs over $115 by January 19, 2018
If SJM climbs over $115 by January 19, 2018, our 100 shares will get sold (“called away”) at $115 per share.
In “Scenario 2” — like “Scenario 1” — we’ll collect an instant $325 in premium ($3.25 x 100 shares) when the trade opens. However, we’ll also generate a loss of $31 (-$0.31 x 100) when the trade closes because we’ll be buying 100 shares at $115.31 and selling them at $115. That said, we’ll still book a profit.
In this scenario, excluding any commissions, we’d be looking at a $294 profit.
From a percentage standpoint, this scenario would deliver an instant 2.8% yield for selling the covered call ($3.25 / $115.31) and a -0.3% loss (-$0.31 / $115.31).
At the end of the day, we’d be looking at a 2.5% total return in 60 days, which works out to a 15.5% annualized yield from SJM.
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 $112.06 ($115.31 – $3.25) 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 J.M. Smucker Company (SJM) 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 $325 in premium we’d collect for selling one contract, that would require a minimum investment of $11,206.
Good Trading!
Greg Patrick
P.S. How safe is SJM’s dividend? We ran the stock through Simply Safe Dividends, and as we go to press, its Dividend Safety Score is 91. Dividend Safety Scores range from 0 to 100. A score of 50 is average, 75 or higher is excellent, and 25 or lower is weak. With this in mind, SJM’s dividend appears very safe, with a dividend cut extremely unlikely (you can learn more about Dividend Safety Scores here.)
P.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.