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 August, I introduced you to a high-yield trade with Starbucks (SBUX) that was poised to deliver an 8.3% to 25.9% annualized yield.
If you made the trade, congratulations: the options contract you sold expired worthless on October 20. You booked an 8.3% annualized yield so far and you still own the shares.
If you previously bought under $55 per share (which you should have), then consider selling the $55 strike price with an expiration date of November 24, 2017.
That will give you outsized income today, potentially set you up for a dividend payment, and still ensure a capital gain if shares get called away at expiration.
I just made this trade in my own retirement portfolio. I sold to open one November 24, $55 call option on my 100 shares of SBUX at a limit price of $1.20 per share.
It’s poised to generate an annualized yield of 24.4% to 61.7%. I’ll share the details of this specific trade in tomorrow’s issue of Trades Of The Day.
For those who are looking to initiate a new high-yield trade with Starbucks today, here’s what we’re looking at…
High-Yield Trade of the Week:
Sell the November 24, 2017, $55 call on shares of Starbucks (SBUX)
As we go to press, SBUX is selling for $54.87 per share and the November 24 $55 calls are going for about $1.20 per share.
Our trade would involve buying 100 shares of SBUX 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 $55 per share (the “strike” price) anytime before November 24 (the contract “expiration” date).
In exchange for that opportunity, the buyer of the option would be paying us $1.20 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: SBUX stays under $55 by November 24
If SBUX stays under $55 by November 24, our options contract would expire and we’d get to keep our 100 shares.
In the process, we’d receive $120 in premium ($1.20 x 100 shares).
That income would be collected instantly, when the trade opens.
Excluding commissions, if “Scenario 1″ plays out, we’d receive a 2.2% yield for selling the covered call ($1.20 / $54.87) in 32 days. That works out to a 25% annualized yield.
Scenario #2: SBUX climbs over $55 by November 24
If SBUX climbs over $55 by November 24, our 100 shares will get sold (“called away”) at $55 per share.
In “Scenario 2” — like “Scenario 1” — we’d collect an instant $120 in premium ($1.20 x 100 shares) when the trade opens. We’d also generate $13 in capital gains ($0.13 x 100) when the trade closes because we’d be buying 100 shares at $54.87 and selling them at $55.
In this scenario, excluding any commissions, we’d be looking at a $133 profit.
From a percentage standpoint, this scenario would deliver an instant 2.2% yield for selling the covered call ($1.20 / $54.87) and a 0.2% return from capital gains ($0.13/ $54.87).
At the end of the day, we’d be looking at a 2.4% total return in 32 days, which works out to a 27.7% annualized yield from SBUX.
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 $53.67 ($54.87 – $1.20) 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 Starbucks (SBUX) 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 $120 in premium we’d collect for selling one contract, that would require a minimum investment of $5,367.
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.