This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

7 Dividend-Capture Ideas Using an Option Hedge

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.
1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
ARCC $15.20 0.00%
CMA $44.93 0.00%
DLR $88.06 0.03%
ECL $115.30 0.00%
MSI $75.32 -0.03%


Chart of I:DJI
DOW 17,830.76 -210.79 -1.17%
S&P 500 2,075.81 -19.34 -0.92%
NASDAQ 4,805.2910 -57.85 -1.19%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs