Make 9.7% On America's Most Notorious Bank

By Jay Soloff, Investors Alley, Tuesday, July 7

Despite plenty of volatility in the market, it hasn’t been any easier to generate income for your portfolio. Yields are still ultra-low for most fixed income instruments. Moreover, many high-yield dividend stocks have slashed their dividend payments.

Regarding dividend stocks, buying and holding them is certainly not an unreasonable way to generate yield. The best companies are still paying dividends. And, even the riskier companies will be fine in the long run if they aren’t a bankruptcy risk. (I strongly recommend not investing in companies about to go bankrupt.)

Nevertheless, dividend stocks aren’t the best way to generate yield over the short-term. Fixed income products are typically even worse. You need to get a little creative in order to find decent yields over a shorter period.

Or, you could simply use covered calls to increase yield.

A covered call is a strategy that combines stock buying with option selling. It’s really quite easy to do, and just about every broker should make it easy to execute this strategy. Covered calls are so popular, that several ETFs and funds are entirely based on the strategy.

Let’s look at an actual covered call trade from this week to give you an idea of just how useful it can be to increase your portfolio’s yield. The trade I’m looking at involves Wells Fargo (WFC). Now, Wells Fargo is interesting because bank stocks have been hit pretty hard due to the pandemic and ultra-low interest rates. As such, the stock is paying an 8% dividend.

As one of the largest banks in the country, Wells Fargo is a relatively safe pick. There is virtually no short-term bankruptcy risk. And, the projected dividend should also be safe: a 51 cent payment in August. That means a covered call (which also buys the stock) will also include expected dividend payments.

This particular trade had the covered call trader buying 500,000 shares of Wells Fargo at $25.64 per share. At the same time, the trader sold 5,000 October 16th 27.5 strike calls for $1.98. Selling the calls provides a 7.7% yield on the trade. With the dividend in August, the entire position will yield 9.7%… and all before Halloween.

Looking at the chart, you can see Wells Fargo is already near its bottom for the last several months (including the March crash). So, there doesn’t seem to be a lot of additional downside risk. Plus, the $1.98 yield from the covered call means you can’t lose money on this trade until the stock price drops below $23.66.

What’s more, selling the 27.5 calls also means the trade can earn appreciation on the stock price up to $27.50. That’s an additional $1.86 in upside potential on the position should the stock price move higher by then. All told, if WELLS FARGO is at $27.50 or above at October expiration, this trade can earn 17% profits in under 4 months, and do so without a lot of risk involved.

Read this if you've ever lost money trading options [sponsor]

Does everything seem to go wrong right after you place an options trade? You watch the stock and everything is going right.

Then you open the trade... and within an hour, you've lost money. It's not your fault. You just simply weren't given the "behind the scenes" knowledge every options professional knows. The road to success for your first big, triple-digit options win is simple. Have a checklist for every trade so you don't repeat rookie mistakes. For the first time ever, after 20 years, I'm releasing my own personal options trading checklist for no charge. Click here to get the checklist and stop losing money right now.


RediNews | | Copyright © 2013 - 2020, All Rights Reserved

Nothing in is intended to be investment advice, nor does it represent the opinion of, counsel from, or recommendations by BNK Invest Inc. or any of its affiliates, subsidiaries or partners. None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable for any specific person. All viewers agree that under no circumstances will BNK Invest, Inc,. its subsidiaries, partners, officers, employees, affiliates, or agents be held liable for any loss or damage caused by your reliance on information obtained. By visiting, using or viewing this site, you agree to the following Full Disclaimer & Terms of Use and Privacy Policy. Video widget and market videos powered by Market News Video.