This week’s High-Yield Trade of the Week is with Schwab US Dividend Equity ETF (SCHD), a top-ranked dividend growth fund that Dave Van Knapp has been buying recently.
The idea featured below is similar to the one I just made in my retirement portfolio.
In short, on August 29, 2022 I sold one April 21, 2023 $73 cashed-secured PUT option on SCHD for $4.00 per share. This trade generated $400 in “instant income”, which is the equivalent of an 8.5% annualized yield.
If you’re interested in making a similar high-yield trade for yourself, here’s what we’re looking at as I write. Since share prices and options premiums are constantly changing, the numbers below are approximate.
High-Yield Trade of the Week:
Sell the April 21, 2023 $73 PUT on shares of Schwab US Dividend Equity ETF (SCHD)
As I write, SCHD is selling for around $73.74 per share and the April 21, 2023 $73 puts are going for about $4.00 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 SCHD at $73 per share (the “strike” price) anytime between now and April 21, 2023 (the contract “expiration” date).
In exchange for that opportunity, the buyer of the option is paying us $4.00 per share (the “premium”).
There are two likely ways our High-Yield Trade of the Week would work out, and they’re both attractive for investors looking for relatively safe, high income…
Scenario 1: SCHD falls below $73 by April 21, 2023
If SCHD falls below $73 by April 21, 2023, we may be obligated to buy 100 shares at $73 per share.
In exchange for our agreement, we’d be paid an instant $400 (100 shares X $4.00 per share).
Taking this income into consideration, our cost-basis would drop to $69 per share.
That’s a 6.4% discount to the $73.74 share price that SCHD is selling for right now.
Scenario 2: SCHD stays above $73 by April 21, 2023
If SCHD stays above $73 by April 21, 2023, the contract expires worthless and we’d get to keep the $400 in income.
This works out to an 5.5% return on what our purchase obligation would have been ($4.00 / $73.00) in 235 days.
If we can repeat these results over the period of a year we could generate an 8.5% yield from SCHD — a top-ranked dividend growth fund currently yielding 3.3% — without even buying shares.
P.S. We’d only make this trade if: 1) we wanted to own the underlying fund anyways 2) we believed the strike price was a reasonable price to pay for the fund if we’d end up being “put” shares 3) we were comfortable owning the fund for the long-haul in case the price drops significantly below our cost basis by expiration and 4) we were comfortable “letting the fund get away from us” if shares 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.
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