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NEW YORK ( TheStreet) -- Using options, you can hedge against downward price risk while capturing a dividend. In this article, I provide six examples:
Time Warner (TWX - Get Report) Yield: 2.89%
Dividend Amount: $0.26
Ex-Dividend Date: May 29, 2012
Strategy: In combination with my buying Time Warner stock and after checking company updates, offer to sell the June $34.00 strike call for $0.33 over the intrinsic value.
The option may get exercised early for a gain. In almost all cases, I sell the call option first to ensure the stock option leg is complete. If not, after qualifying for the dividend, I will attempt to close out the trade with a gain of near $0.10, plus the dividend earned.
When learning a new trading strategy it is better to use a
simulated trading account first.
Stockpickr is a great tool to practice new strategies and learning about the market. I use
Stockpickr and recommend it. It is easy to make mistakes when starting out on a new strategy and mistakes cost a lot less with a simulated account. After a level of confidence is built, then it may be time to move into a real money account.
Time Warner upcoming stock dividend appears to be attractive and worth the time and effort to capture. A requirement I have is be able to sell a call option in either the front, or first back month that is in the money, and with enough premium that I will not object to an early exercise notice (which does happen from time to time, but profitable if everything is done according to plan).
It is important to sell the call option hedge at or near the asking price for at least the minimum amount over intrinsic value. I don't want the option hedge unless the sale will provide at least the minimum $0.33 over intrinsic value.
If my shares are called away the day before trading ex-dividend(resulting from the option buyer wanting the dividend), I gain about $0.33 The most I can make is $0.59 if I hold the covered call through option expiration day and the stock gets called away.