7 Dividend Captures Using an Option Hedge

NEW YORK (TheStreet) -- Many high-quality companies offer quarterly dividends to investors. Dividends may be a great source of income. What's more, with each dividend payment received, shareholders are able to lower their cost in an investment. The most important requirement to receive a dividend is to be a shareholder on the required day of record.

Here are seven dividend-paying stocks to play using options as a hedge against downward price risk:

Expeditors International of Washington (EXPD) provides logistic services in the United States and internationally.

Expeditors International
Yield: 1.44%
Dividend Amount: $0.28
Ex-Dividend Date: May 30, 2012
Beta: 0.88

Strategy: Buy Expeditors International stock and offer to sell the June $37.50 strike or lower call for 92 cents 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 look to close out the covered option with a gain of about 34 cents, plus the dividend received.

When learning a new trading strategy, it is better to first use a simulated trading account. Stockpickr is a great tool to practice new strategies and learn about the market. I use Stockpickr and recommend it. It is easy to make mistakes when starting out on a new strategy; 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.

The criteria I use is that I must 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 mind getting exercised early (which happens often and can be a good thing if the trades are executed correctly).

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 92 cents 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 92 cents. The most I can make is $1.20, if I hold the covered call through option expiration day and the stock gets called away.

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