This week’s High-Yield Trade of the Week is with Cisco (CSCO), one of our Income Builder Portfolio holdings.
The trade idea featured below is similar to the trade I made in my retirement portfolio yesterday.
In short, I bought 100 shares of CSCO at $39.31 per share and simultaneously sold one January 15, 2021 $40 call option for $1.94 per share (which generated $194 in immediate income).
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 $41 call on shares of Cisco (CSCO)
As we go to press, CSCO is selling for around $39.14 per share and the January 15, 2021 $41 calls are going for about $1.45 per share.
Our trade would involve buying 100 shares of CSCO and simultaneously selling one of those calls.
By selling a call option, we’re giving the buyer of the option the right, but not the obligation, to purchase our 100 shares at $41.00 per share (the “strike” price) anytime before January 15, 2021 (the contract “expiration” date).
In exchange for that opportunity, the buyer of the option is paying us $1.45 per share (the “premium”).
Because we’re collecting immediate income when we open the trade, we’re lowering our cost basis on the shares we’re buying from $39.14 to $37.69.
In other words, we’re buying the stock at a 3.7% discount to its current price.
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…