With the stock paying a dividend yield of just 2.9%, it's probably not on the radar of many retirees who are looking for safe, high income.
In fact, a million-dollar portfolio with that kind of yield would pay you just $29,000 a year.
But what if you could make a high-yield trade right now with PepsiCo shares that boosts your income significantly — generating an annualized yield in the double-digits?
In fact, I just used this strategy to make a high-yield trade with PepsiCo on Friday… and the trade is poised to generate a 14.6% to 15.3% annualized yield.
However, since share prices and options premiums are constantly changing, the numbers below are more current than the trade I made Friday.
As we go to press, PEP is selling for around $110.23 per share and the November 17 $110 calls are going for about $2.07 per share.
By selling call options, we would be giving the buyer of the option the right, but not the obligation, to purchase our 100 shares at $110 per share (the "strike" price) anytime before November 17 (the contract "expiration" date).
In exchange for that opportunity, the buyer of the option would be paying us $2.07 per share (the "premium") per option.
If PEP stays under $110 by November 17, our options contract would expire and we'd get to keep our 100 shares.
In the process, we'd receive $207 in premium ($2.07 x 100 shares).
Excluding commissions, if "Scenario 1″ plays out, we'd receive a 1.9% yield for selling the covered call ($2.07 / $110.23) in 39 days. That works out to a 17.6% annualized yield.
If PEP climbs over $110 by November 17, our 100 shares will get sold ("called away") at $110 per share.
In "Scenario 2" — like "Scenario 1" — we'd collect an instant $207 in premium ($2.07 x 100 shares) when the trade opens. We'd then lose out on or have to pay another $23 in capital loss ($0.23 x 100) when the trade closes because we'd be buying 100 shares at $110.23 and selling them at $110.
In this scenario, excluding any commissions, we'd be looking at a $184 profit.
From a percentage standpoint, this scenario would deliver an instant 1.9% yield for selling the covered call ($2.07 / $110.23) and a -0.2% return from capital gains ($0.23 / $110.23).
At the end of the day, we'd be looking at a 1.7% total return in 39 days, which works out to a 15.6% annualized yield from PEP.
We'd place a "Buy-Write" options order with a Net Debit price of as close to $108.16 ($110.23 – $2.07) as we can get — the lower the better. Options contracts work in 100-share blocks, so we'd have to buy at least 100 shares of PepsiCo (PEP) for this trade. For every 100 shares we'd buy, we'd "Sell to Open" one options contract using a limit order. Accounting for the $207 in premium we'd collect for selling one contract, that would require a minimum investment of $10,816.