This week’s High-Yield Trade of the Week is with Medtronic (MDT), a Dividend Aristocrat we keep buying for our Income Builder Portfolio.
The high-yield trade idea featured below is similar to the high-yield trade I made in my retirement portfolio this past Thursday.
In short, I sold one January 15, 2021 $100 PUT option on MDT for $3.72 per share. I essentially got paid $372 in income for the opportunity to buy Medtronic at a nice discount.
It will post to our Dividends and Income YouTube channel.
If you want to watch my screen as I actually place this trade in my retirement account at Fidelity, be sure to subscribe to the channel and tap the notification bell so you’re alerted as soon as the video gets published.
If you’re interested in a similar trade for yourself, here’s what we’re looking at as we go to press today. Since share prices and options premiums are constantly changing, the numbers below are approximate at the time this alert is being published this morning.
High-Yield Trade of the Week:
Sell the January 15, 2021 $100 PUT on shares of Medtronic (MDT)
As we go to press, MDT is selling for around $108.45 per share and the January 15, 2021 $100 puts are going for about $3.00 per share.
Our trade would involve selling one of those puts.
By selling a put option, we’re giving the buyer of the option the right, but not the obligation, to sell us 100 shares of Medtronic at $100 per share (the “strike” price) anytime between now and January 15, 2021 (the contract “expiration” date).
In exchange for that opportunity, the buyer of the option is paying us $3.00 per share (the “premium”).
There are two likely ways our High-Yield Trade of the Week would work out, and they’re both attractive…
Scenario 1: MDT falls below $100 by January 15, 2021
If MDT falls below $100 by January 15, we may be obligated to buy 100 shares at $100 per share.
In exchange for our agreement, we’d be paid an instant $300 (100 shares X $3.00 per share).
Taking this income into consideration, our cost-basis would drop to $97 per share.
That’s a 10.6% discount to the $108.45 share price that MDT is selling for right now.
Scenario 2: MDT stays above $100 by January 15, 2021
If MDT stays above $100 by January 15, the contract expires worthless and we’d get to keep the $300 in income.
This works out to a 3.0% return on what our purchase obligation would have been ($3.00 / $100) in 95 days.
If we can repeat these results over the period of a year we could generate an 11.5% yield from Medtronic without even buying shares.
P.S. We’d only make this trade if: 1) we wanted to own the underlying stock anyways 2) we believed the strike price was a reasonable price to pay for the stock if we’d end up being “put” shares 3) we were comfortable owning the stock for the long-haul in case the price drops significantly below our cost basis by expiration and 4) we were comfortable “letting the stock get away from us” if the stock takes off and our contract expires worthless. To be mindful of position sizing, except in rare cases, the value of this trade (if put shares) 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). Finally, and very important for managing risk, we’d only sell CASH-SECURED puts… never “naked” puts on margin.
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.The #1 Stock Under $5 [sponsor]
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