High-Liquidity Dividend Captures: Independence Day Edition

NEW YORK (TheStreet) -- Dividend capturing is relatively new to the retail investor. Before the Internet, transaction costs, limited option liquidity and lack of information created barriers, preventing investors from exploiting this market edge. The most important requirement to receive a dividend is to be a shareholder on the required day of record.

Like most investing, there is no free lunch on Wall Street. At the same time, dividend capturing survives, due to the inability to scale very well. This method can be used to capture multiple dividends by holding the stock and option longer than three months.

For writers of options, Theta (time decay of option premium) is their best friend, and for buyers, the worst enemy. Options are a decaying asset much like milk, and using an option hedge while holding a stock can be profitable, even if the stock doesn't move higher. This is especially true in higher-yielding stocks, since higher-yield options have lower-time premiums, all else being equal.

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).

A requirement I have is to 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 object to an early exercise notice (which does happen from time to time, but is profitable if everything is done according to plan).

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.

The following four stocks have a lot in common. They all have unusually large option volume/premium. There's no struggle to find hedges, as the large liquidity of these option hedges makes it easy to enter into the trades. Also, they all go ex-dividend the same week of July 4.

1 2 3 4 5 Next › Last »