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High-Liquidity Dividend Captures: Independence Day Edition

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American Express Company (AXP - Get Report)

American Express is primarily engaged in the business of providing travel-related services, financial advisory services and international banking services; it is headquartered in New York city.

Yield: 1.43%
Dividend Amount: 20 cents
Ex-Dividend Date: July 3, 2012
Beta: 1.82

Strategy: Buy American Express stock and offer to sell the July $50.00 strike or lower call for 58 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 41 cents, plus dividend.

With the yield of American Express at only 1.43%, as much or more of the gain should be coming from the option premium; otherwise it does not make sense to try to execute this trade.

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 58 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 58 cents. The most I can make is 78 cents, if I hold the covered call through option expiration day and the stock gets called away.

Here is a look at American Express with others in the industry:

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