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TheStreet Open House

7 Dividend-Capture Ideas Using an Option Hedge

Stocks in this article: ARCC DLR TROW EMN XL CMA MSI ECL

NEW YORK ( TheStreet) -- Quarterly dividends can be a great source of income. With each dividend payment received, investors are able to lower their risk. Investors need to be a shareholder on the day of record for the dividend. To qualify as a shareholder of record you must buy the stock before it trades ex-dividend and keep it until the ex-dividend date.

Using call options for hedging is one of my favorite and easy-to-understand methods of capturing gains through options and dividends. This method can be used to capture more than one option by holding them longer than three months.

I sorted by highest yield first and Ares Capital (ARCC - Get Report) is the highest with a yield of over 9%. Ares Capital is a credit-focused private investment adviser.

   Yield: 9.74%
   Dividend Amount: 37 cents
   Ex-Dividend Date: June 13, 2012
   Beta: 1.79

Strategy: Buy Ares Capital stock and sell the June $15.00 strike or lower call for 25 cents over the intrinsic value. I sell the call option first to ensure the stock option leg is complete.

The option strike has an encouraging open interest over 800.

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 learn 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.

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 25 cents over intrinsic value.

If my shares are called away before trading ex-dividend (resulting from the option buyer wanting the dividend), I gain about 25 cents. The most I can make is 62 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 price moving events. This is especially critical during earnings season.

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