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 CVS Health (CVS) that was poised to deliver a 19.9% to 32.4% annualized yield.
If you made the trade, congratulations: the options contract you sold likely expired worthless on August 25 and you booked a 19.9% annualized yield.
You would have used the $78 strike price again with the September 22 expiration date.
If you did this, your shares would have likely been called away (since the stock was trading above $78 after close of bell on Friday).
The trade would be closed and you would have generated both call income and a capital gain.
If you’re in this camp, we don’t have a new trade for you today. Sit on your cash for now.
If you didn’t sell another round of calls last month, and you’re still holding shares, consider selling another round today.
For example, if you previously bought under $78 per share, then consider selling a call now at the $78 strike price with an expiration date of October 27, 2017.
That will give you tremendous income today, set you up for a dividend payment, and still ensure a capital gain if shares get called away at expiration.
Here’s an example of a trade we’d make — but ONLY if you’re sitting on the shares from our last CVS trade and if you had bought under $78…
High-Yield Trade of the Week:
Sell the October 27, 2017, $78 calls on shares of CVS Health (CVS)
As we go to press, the October 27, $78 calls for CVS are going for about $3.25 per share. Our trade would involve selling these call options.
Assuming you had purchased at $77.08 (CVS’ share price at the time of our last high-yield trade), then here are two likely ways our High-Yield Trade of the Week would work out this time around:
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: CVS is trading under $78 on October 27
If CVS is trading under $78 on October 27, our options contract would expire and we’d continue to hold our shares.
In the process, we’d receive $325 in premium ($3.25 x 100 shares) for every contract sold.
That income would be collected instantly, when the trade opens.
Excluding commissions, if “Scenario 1″ plays out, we’d receive a 4.2% yield for selling the covered calls ($3.25 / $77.08) in 32 days. That works out to a 48.1% annualized yield.
Scenario #2: CVS stays over $78 by October 27
If CVS stays over $78 by October 27, our shares will get sold (“called away”) at $78 per share.
In “Scenario 2” — like “Scenario 1” — we’d collect an instant $325 in premium ($3.25 x 100 shares) for every contract sold. We’d collect this income when the trade opens.
We’d also generate $92 in capital gains ($0.92 x 100) when the trade closes because we’d be buying 100 shares at $77.08 and selling them at $78.
In this scenario, excluding any commissions, we’d be looking at a $417 profit.
From a percentage standpoint, this scenario would deliver an instant 4.2% yield for selling the covered calls ($3.25 / $77.08) and a 1.2% return from capital gains ($0.92 / $77.08).
At the end of the day, we’d be looking at a 5.4% total return in 32 days, which works out to a 61.7% annualized yield from CVS.
Here’s how we’d make the trade…
We’d place a “Sell-to-Open” call option order with a limit price of as close to $3.25 as we can get — the higher the better. The expiration date we’d choose is October 27, 2017.
Good Trading!
Greg Patrick
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.