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Strategy To YieldBoost AEP To 7.2% Using Options

Shareholders of American Electric Power Co Inc (AEP) looking to boost their income beyond the stock's 3.1% annualized dividend yield can sell the January 2021 covered call at the $95 strike and collect the premium based on the $4.30 bid, which annualizes to an additional 4.1% rate of return against the current stock price (at Stock Options Channel we call this the YieldBoost), for a total of 7.2% annualized rate in the scenario where the stock is not called away. Any upside above $95 would be lost if the stock rises there and is called away, but AEP shares would have to advance 4.7% from current levels for that to occur, meaning that in the scenario where the stock is called, the shareholder has earned a 9.4% return from this trading level, in addition to any dividends collected before the stock was called.
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