NEW YORK (TheStreet) -- Using a call option to hedge against downward price risk is my favorite dividend-capture strategy. With this strategy, I have found I must be highly selective in my stock targets. In this review, I filter for the most worthy stocks also offering dividends.
Let's look at my first stock, Gannett (GCI) as an example. Gannett operates as a media and marketing solutions company in the U.S. and internationally.
Dividend Amount: $0.20
Ex-Dividend Date: June 06, 2012
Strategy: Buy Gannett stock and offer to sell the June $13.00 strike or lower call for 37 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 19 cents, plus the quarterly dividend paid by the company.I review many call strikes and estimate the expected probabilities based in part on beta, bid, offer, volume traded the current day, open interest and time value/implied volatility. Call options offer some protection from possible adverse moves in the stock price and provide offset revenue when the options do not fully cover down moves in the stock. Income is welcomed, but not needed from option premiums, so a break even from option premiums received/stock losses ratio is a win. 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. Gannett's 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 the first back month that is in the money, and with enough of a premium that I will not object to an early exercise notice. This does happen from time to time, can be 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 37 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 37 cents. The most I can make is 57 cents if I hold the covered call through option expiration day and the stock gets called away. My last step (completed before making a trade on the same day) is to check company announcements and news sources for possible events that may cause the stock price to move. This is especially critical during earnings season.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV