NEW YORK (TheStreet) -- Many high-quality companies offer quarterly dividends to investors. Dividends may be a great source of income because with each payment shareholders can lower their investment cost, as long as they are shareholders on the required day of record.
With my portfolio, although much of the gains will come from dividends the option decay will provide a big part of my gains. Option decay, or Theta, is the loss in time premium between two dates. This is especially true in lower-yielding stocks since higher-yield options have lower-time premiums, all else being equal.
Let's say I write an option today to you for $1 with an expiration in two months. After one month, you would expect the value to drop in half (not actually, but you get the idea). If I write a covered call with 30 cents in time premium and the option buyer exercises the option in front of the ex-dividend date, I get to keep the time premium paid (because the buyer is exercising).
Also, the longer I maintain a covered-call position (like two weeks with a front-month option, for example) the lower the time premium is worth (all else being equal).Consider: Humana (HUM) Humana is a health-services company that facilitates the delivery of health care through networks of providers to its medical members. The company was founded in 1961 and is headquartered in Louisville, Ky. Yield: 1.37% Dividend Amount: 26 cents Ex-Dividend Date: June 27, 2012 Beta: 1.11 Strategy: Buy Humana stock and offer to sell the July $75.00 strike or lower call for $3.92 over the intrinsic value. The covered call may get exercised early for a gain. If not, after qualifying for the dividend, I will look to close out the covered option with a gain of about $2.45, plus the dividend received. The most I can make is $4.18 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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