A 19% Yield From a Blue-Chip Favorite?
Right now you can earn big, double-digit “instant yields” from some of the safest blue-chip stocks in the world.
For example, we’ve found yields as high as 9.9% from Coca-Cola (NYSE: KO)… 12.4% from AT&T (NYSE: T)… and even as much as 19% from software giant Microsoft (NASDAQ: MSFT).
This isn’t some investment gimmick either. The payouts I’m talking about are settled in cash. That is, every time you get one of these payments, the money is added to your brokerage account immediately.
Here’s how it works…
|Basic Terms |
Option Buyer (Option Holder) — Party that purchases and holds the options contract.
Option Seller — Party that writes, or creates, the options contract.
Strike Price — The price at which the option seller agrees to buy or sell a certain stock in the future.
Option Contract — Each options contract represents an interest in 100 shares of the underlying stock.
Premium — The price of the options contract. The option buyer pays the option seller the premium.
Call Writing — The call buyer pays the call seller a premium for the right (but not the obligation) to buy a stock or ETF from the seller at the strike price.
At first glance, these payouts may seem impossible. After all, a quick look at Yahoo Finance tells us that all of the stocks listed above have dividend yields of only 2% to 5%.
So how are investors earning so much income from giant brand-name stocks like Coca-Cola, AT&T and Microsoft?
It’s easy. They’re selling covered calls.
On the surface, selling covered calls seems like a complex concept. It involves options, an investing tool most investors don’t know much about to begin with.
But when done properly, selling covered calls can be one of the market’s most lucrative investment strategies — especially for income investors. That’s because covered calls allow investors to take advantage of the dividends from their holdings while also collecting extra “instant income” checks on the side.
Profitable Trading’s resident options expert, Amber Hestla, explains how covered calls work in her newsletter, Maximum Income:
|“When we write a call option contract, we create a contract that says we will sell the underlying shares to the option owner at the specified price (called the “strike price”), if it is met. |
In return, we receive a cash payment upfront from the option buyer. Depending on how many of these contracts you sell, the payments you receive can reach well into thousands of dollars.
A “covered” call is when you personally own the underlying shares for the option you write. This helps reduce your risk, while making it easier to access the huge payments available from writing call options.
Best of all, if the stock stays below the “strike price” you specify in the option contract (you get to choose the strike price), then the option is said to expire worthless. That’s good for us.”
Let’s use Microsoft as an example.
How to Earn a 19% Yield From This Software Giant
#-ad_banner-#Almost every person on the planet has heard of Microsoft. The company’s flagship product line, its Windows operating system, is installed on nearly 90% of computers around the globe.
As such a powerful player in the tech industry, you wouldn’t expect Microsoft to offer investors much of an opportunity to snag big yields. And in fact, by itself, the company only pays $1.44 a year in dividends — giving the stock a 2.8% annual yield.
But while 2.8% isn’t bad (especially considering the S&P 500 pays only 1.9%), we can do even better with covered calls. In fact, I’ll show you how to collect as much as $950 in cash — equal to a 19% yield — by selling covered calls on it.
Here’s a step-by-step breakdown of how that trade would look…
The first step to executing any covered call strategy is to make sure you first own the underlying shares of the security (so you’re “covered”). For Microsoft, that would include going out and buying at least 100 shares of the stock at today’s share price around $50.
Once you’ve bought the shares, now you’re ready to write one call option per 100 shares you own.
While that may sound like a difficult process, it’s really not. Just tell your broker that you would like to sell a covered call, and they’ll be happy to execute the trade for you. A lot of online discount brokerages offer this service, too. You can even use this strategy with most retirement accounts.
The amount of money you receive in “instant income” from selling the option depends on how high you set the strike price away from the stock’s current price. The closer the strike price is to the stock’s current price, the more money (known as premium) you receive.
Right now you can sell calls on Microsoft with a $52 strike price that expire on July 22 for around $0.95 a share. Since each contract represents 100 shares, you would collect roughly $95 in premium upfront on the day you sell the option for agreeing to enter the contract.
If Microsoft is trading below $52 a share when the option expires, you would retain the shares and the money you collected from selling the option is yours to keep as pure profit.
If Microsoft is trading above $52 when the option expires, then you would still get to keep the $95 in instant income, but you would be required to sell the shares for $52 — almost $2 above where you purchased them.
It’s a win-win: Regardless of whether the option you sold expires worthless or not, you’re still going to make money in the trade.
But the best part about this approach is that as long you own the underlying stock, you can continue to sell covered calls on it — capturing big “instant income” payments every time.
To see how this works, let’s stay with the Microsoft example.
If you continue to write covered calls on a rolling five-week basis, you could potentially sell 10 covered calls on the stock over the course of a year.
Assuming you receive a similar amount for each contract, the options would generate $950 (10 x $95) in additional income each year. Considering your initial investment of $5,000 (what you paid to buy 100 shares in the first place), by selling the covered calls you would generate a 19% annual yield on your investment.
And that’s from a big, well-known company like Microsoft. The returns get even bigger if you’re willing to travel off the beaten path.
Traditional investments alone are not going to pay for your retirement, but strategies like selling covered calls can help you close the gap. If you’re even remotely concerned about your retirement and want to know more about this strategy, check out this link.