I’m alerting you to a new income trade I made yesterday with Amgen (AMGN) — a long-term holding in my Income Builder Portfolio that’s managed by Mike Nadel, and a stock recently profiled by Jason Fieber in his Undervalued Dividend Growth Stock of the Week series.

At the time I placed my trade yesterday, AMGN was selling for $228.35 per share and the June 18, 2021 $215 put options were going for around $12.00 per share.

My trade involved selling one of these put options, and the order filled at $12.05 per share.

There are two probable ways this trade will work out…

Scenario 1: AMGN falls below $215 by June 18, 2021
If AMGN falls below $215 by June 18, I may be obligated to buy 100 shares at $215 per share… which is a $21,500 commitment.

In exchange for my agreement to that potential purchase obligation, I was paid an instant $1,205 (100 shares X $12.05 per share).

This money was immediately deposited into my 401(k) retirement account, where I made the trade.

Taking this income into consideration, my cost-basis on Amgen would drop to $202.95 per share.

That’s an 11% discount to Amgen’s share price at the time I placed the trade yesterday, and a 23% discount to the $261.91 fair value estimate that Jason came up with. So I’m getting a nice margin of safety on an already discounted stock.

Scenario 2: AMGN stays above $215 by June 18, 2021
If AMGN stays above $215 by June 18, the contract expires worthless and I get to keep the $1,205 in income.

Because this was a “cash-secured” put, the $21,500 in cash that I set aside as a potential purchase obligation for this trade is essentially “tied up” until June 18. However, while it’s tied up, it’s earning a nice yield on what my purchase obligation would have been: a 5.6% return  ($12.05 / $215) in just over 24 weeks.

If I can repeat these results over the period of a year I could generate a 12.0% yield from Amgen without even buying shares. The neat thing about this trade is that it makes money if the stock goes up… stays flat… or even drops as much as 23% by June 18, 2021.

Greg Patrick
TradesOfTheDay.com

P.S. When it comes to selling puts, I’ve developed a few rules that fit my portfolio objectives. I only sell a put option if:

  1. I want to own the underlying stock anyways
  2. I’ll be buying the stock at a reasonable price (which is typically fair value or better)
  3. The strike price of the option I’m selling is At-The-Money (ATM) or Out-of-The-Money (OTM)
  4. I’m comfortable owning the stock for the long-haul in case the price drops significantly below my strike price
  5. I’m comfortable “letting the stock get away from me” if I don’t get “put” shares and the stock takes off
  6. My position-sizing makes sense if I’m “put” the shares
  7. I can make the trade in a retirement account, such as an IRA or 401(k) to minimize taxes and tax paperwork. 

Please keep in mind that these trade alerts are for information purposes only. We’re not registered financial advisors and these aren’t specific trade recommendations for you as an individual. Each of our readers have different financial situations, risk tolerance, goals, time frames, etc. The ideas we publish are simply ideas that we feel fit our specific needs and that we’re personally making in our own portfolios. 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 make our trade to the time you’re alerted about it. So please don’t attempt to make this “High-Yield Trade” yourself without first doing your own due diligence and research.