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An Aggressive Income Trade Idea

If you are an income-focused investor, and you occasionally like to take on more aggressive trading opportunities, we have an interesting idea for you that we believe is worth considering.

As you may be aware, we have recently been writing (in our Blue Harbinger Weekly) about the strong performance of growth stocks, and we’ve been speculating about when the growth stock rally might slow. Well, over the last two trading days, growth stocks have pulled back sharply.

We are certainly not calling a bottom in growth stocks here (there could be a lot more pain to come- we simply don’t know). But we are saying that now is a more attractive time to buy some growth stocks because of the recent pullback. For example, last week we wrote about the attractiveness of technology growth stock Skyworks (SWKS) (See: Consider Nibbling at this Disciplined Dividend Growth Stock). Skyworks is a rapidly growing semiconductor company (that pays a growing dividend), and as the above chart shows, the shares have pulled back over the last couple trading days.

As we mentioned above, we are not calling a bottom in Skyworks (or growth stocks in general), but we do still believe Skyworks is an attractive long-term investment opportunity.

An income generating options trade idea: Skyworks

If you are income-focused investor, but you’re still not enamored with Skyworks’ price pullback and its 1.1% dividend yield, then you may want to consider selling put options. In particular, we like the July 21, 2017 puts with a strike price of $95, and offering a premium of $1.45, as shown in the following table.

If the price doesn’t fall to $95 then the shares won’t get put to you, and you simply keep the $1.45 in premium, which equates to approximately a 14.9% annual yield. And if the shares do get put to you then you still get to keep the nice premium and you get to own the shares of an attractive dividend growth stock at a much lower price.

Two important things to point out. First, the premium is a little more attractive for selling these puts now because fear and volatility are a little higher. Specifically, the share price has fallen, and that is making many investors nervous (and options premium increase when investors are scared and nervous). Second, Skyworks announces earnings on July 19th, right before the options expire. This is a big deal because earnings announcement are a big event that can cause stock prices to move significantly in either direction (this is a risk you need to be comfortable with regarding Skyworks). For reference, here is Skyworks recent earnings history in terms of actual versus estimates:

Skyworks has a long history of beating earnings estimates, which is theoretically a good thing because it makes it less likely they could surprise to the downside right before the options expire. You can view the extending earnings history for Skyworks at this link.

As a general reminder, this type of income-generating options trade is not used within our Blue Harbinger Income Equity or Disciplined Growth strategies (you can view our current holdings here). However, based on feedback from readers, we like to occasionally share this type of more aggressive income-generating options trade for you to consider.

And overall, we believe Skyworks presents an attractive opportunity to generate income by writing puts. And if you are an income-focused investor that appreciates the possibility of significant long-term capital appreciation, Skyworks puts are worth considering, in our view.

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