This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Capturing Lowe's Fat Dividend With Options

Stocks in this article: LOWCOSTHD

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 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) 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.

Yield: 2.25%

Dividend Amount: 16 cents

July 23, 2012

Beta: 1.04

Strategy: 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.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

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.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

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.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,805.41 +127.51 0.76%
S&P 500 1,964.58 +13.76 0.71%
NASDAQ 4,483.7150 +30.9230 0.69%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters