NEW YORK (
) -- Dividend capturing is relatively new to the retail investor. Before the Internet, transaction costs, limited option liquidity and lack of information created barriers to this strategy.
The most important requirement for receiving a stock's dividend is to be a shareholder on the stated day of record.
There is no free lunch on Wall Street, but if you get up early enough sometimes you can get a free breakfast. My method can be used to capture multiple dividends by holding a stock and its related options for more than three months.
Theta (the time decay of an option premium) is the best friend of option sellers, but it's the worst enemy of buyers.
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, because higher-yielding options have lower-time premiums, all else being equal.
Also, the longer I maintain a covered-call position (for example, two weeks with a front-month option, for example) the less 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 even if it does, the trade can still be 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.
Lowe's Companies Inc.
(LOW - Get Report)
is a leading home-improvement retailer that targets both do-it-yourself consumers and business customers. The company was founded in 1946 and is based in Mooresville, N.C.
Dividend Amount: 16 cents
July 23, 2012
Buy Lowe's Companies stock and offer to sell the August $26.00 strike or lower call for 26 cents over the intrinsic value. I will attempt to close out the trade with a gain of about 18 cents, plus dividend.