As investors are undoubtedly aware, the broader market, as measured by the SPDR S&P 500 (NYSE: SPY), is down 5% since the beginning of the year. 

Yet one stock that is actually showing a small gain for the year is private equity firm Blackstone Group (NYSE: BX):

#-ad_banner-#While SPY is below its 50- and 100-day moving averages, BX is still above its 50-day (blue line) and its 100-day averages.

BX has a price-to-earnings growth (PEG) ratio of 0.43, signaling that it is undervalued. The PEG ratio compares a stock’s price-to-earnings (P/E) ratio with its earnings growth rate. A PEG ratio of 1 is considered fair value.

The company pays a $2.32 annual dividend, for a current yield of 7.1%. But we can turbocharge the income on this high-yielding stock with a covered call strategy.

A call option is an option to buy or sell shares at an agreed-upon price (the strike price) within a certain period of time. The buyer of a call option purchases the right (but not the obligation) to buy the shares at the strike price.

The seller of a call option (also known as the writer) sells the right to the buyer for a payment known as a premium. In doing so, the seller assumes the obligation to deliver the shares at the agreed-upon price should the buyer choose to exercise her or his right.

With BX trading at about $31.75 per share at the time of this writing, we can buy 100 shares and simultaneously sell a March call option with a $31 strike price, which is currently trading for about $1.70 ($170 per contract) and expires March 22.

Since we receive $1.70 for selling the call, our net cost is lowered to $30.05 per share. To give you some wiggle room, I like this trade at a net cost of $30.25 or less.
Here’s how this covered call trade could work out:

If the shares stay above the $31 strike price, the buyer will buy the shares from us at $31, giving us a gain of at least $0.75 per share, or 2.5% in 44 days. This works out to a per-year rate of return of 21%.

If BX trades lower, we would not experience a loss unless it falls below our net cost of $30.25 or lower, giving us a cushion of more than 5% at current levels.

If BX is below $31 on the third Friday of March, then the call option will expire worthless. We then have the ability to sell another call option against the shares to generate more income and lower our cost basis further.

The current price of the option is about 5% of the stock’s price. Selling an option for that amount every two months would generate income of about 30% a year. Combined with the dividend yield of 7.1%, the income on this position could total just over 37% a year — a more than 400% increase over the dividend alone.

Action to Take –> Using a covered call strategy allows you to generate additional income as you wait for more upside in this high-yielding stock, and it also protects you on the downside in this volatile market.

This article was originally published at ProfitableTrading.com: 
Boost Your Annual Income From This High-Yield Stock by 400%

P.S. If you are interested in using covered calls to earn thousands of dollars each month from stocks you already own, I urge you to check out a new free report from my colleague Amber Hestla. In it, she walks you through one of her favorite investments right now — a special opportunity to earn $1,775 from a single stock every few months. Click here to get it now.