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How to make a 6% yield with Microsoft shares

Making 6 percent worth of yield just by holding Microsoft might sound too good to be true, but that's just what one big trader is attempting to accomplish with the help of options.

In one of Tuesday's biggest single-stock options trades, a trader sold 15,000 January 2016 52.50-strike calls on Microsoft for $1.50 per share, while simultaneously purchasing 420,000 shares of the stock.

This strategy is known as a "covered call" or "buy-write," and the goal is to squeeze as much yield out of a stock as possible.

How does it work?

For starters, since a call represents the right to buy a stock for a given price within a given period of time, selling a call is a strategy that profits if the stock stays below that price within that time period. However, selling a call by itself is extremely risky, since as the stock rises, so do the losses of the trader who is short the call, with no knowable limit.

On the other hand, if the trader is also long the stock, then the worst thing that happens is that the trader's shares of the stock are "called away." That means that in exchange for the money collected for selling the call, the traders' only risk is they will be forced to hand over the shares, thus giving up on the upside above a certain level. (However, note that the level above which a stock has to rise in order for the trader to regret selling the call is the strike price plus the option premium, as the trader realized an immediate gain on the sale.)

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Microsoft
Johannes Elisele | AFP | Getty Images

When it comes to this trade, Dan Nathan of RiskReversal.com makes the assumption that the trader is already long 1.1 million or so Microsoft shares, so that the options sale "overwrites" a position of 1.5 million shares.

In that case, the investors long the stock and short the options would add the $2.25 million made by selling the options (that's $1.50 times 15,000 times the 100 shares each options contract controls) to the 2.7 percent dividend yield that the stock already throws off—for a total yearly "super-yield" of nearly 6 percent, or more than $4 million.

"You're actually getting paid to own the stock ," Nathan said Tuesday on CNBC's "Fast Money."


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    Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

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