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 because higher-yield options have lower-time premiums, all else being equal.
Remember, the longer a covered-call position is held (like two weeks with a front-month option, for example), the lower the time premium is worth when it's time to cover (all else being equal).
Consider:Chesapeake Energy Corporation (CHK) Chesapeake Energy is an independent oil and gas company, was founded in 1989 and is based in Oklahoma City, Okla. Yield: 1.93% Dividend Amount: 9 cents Ex-Dividend Date: July 12, 2012 Beta: 1.26 Strategy: Buy Chesapeake Energy stock and offer to sell the July $16.00 strike or lower call for 22 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 8.2 cents, plus dividend. 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 22 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 22 cents. The most I can make is 31 cents if I hold the covered call through option expiration day and the stock gets called away.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV