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Dividend Captures for Fun and Profit

EXC Dividend Chart EXC Dividend data by YCharts

Exelon (EXC - Get Report)

Background: Exelon is a utility holding company. Its subsidiaries are engaged principally in the production, purchase, transmission, distribution and sale of electricity to residential, commercial, industrial and wholesale customers and the distribution and sale of natural gas to residential, commercial and industrial customers. Exelon is a bold, creative, accountable and committed company, with employees dedicated in their efforts to set the standards for the utility services industry. The company was founded in 1887 and is headquartered in Chicago, Ill. Exelon trades an average of 5.7 million shares per day with a marketcap of $30 billion.

Yield: 5.79%

Dividend Amount: 53 cents

Ex-Dividend Date: Nov. 13

Beta: 0.51

Strategy: The first strategy is the standard dividend capture, but a superior strategy for investors bullish with Exelon follows after. Buy stock and offer to sell the November $35.00 strike or lower call for 26 cents over the intrinsic value.

Large yield stocks like Exelon, at 5.79%, often attract a lot of interest in dividend capturing so the option premium may be hard to get.

Don't enter into this trade unless the sale will provide at least the minimum 26 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 26 cents. The most I can make is 69 cents if I hold the covered call through option expiration day and the stock gets called away. This is unlikely and the odds favor having your shares called away first.

A better strategy is to buy the November $34 calls (maybe from someone who doesn't fully understand the market dynamics of price action before a large dividend stock is about to trade ex-dividend) for 5 cents above intrinsic value.

By buying the November $34 call, you're risk is a total of the option premium (for example $1.55 at the close Friday), and you have unlimited upside. The typical reason not to buy call options is all but non-existent with such a small time premium. In fact, you can expect to sell the option over a week later and receive the full time value back, or lose at the very most five cents.

Large dividend stocks tend to rise in front of their ex-dividend date. It's easy to understand why. Sellers are motivated to capture that last dividend, keeping their shares off the market, and investors are motivated to capture that first dividend. The result is a slight skewing of greater demand and lower supply. All else being equal, in the days before trading ex-dividend, expect the price to rise.

I use a proprietary blend of technical analysis, financial crowd behavior and fundamentals in my short-term trades, albeit not totally the same in longer swing trades to investments, the concepts used are similar. You may want to use this article as a starting point of your own research with your financial planner.

EXC Payout Ratio TTM Chart EXC Payout Ratio TTM data by YCharts

At the time of publication, the author held no positions in any of the stocks mentioned.
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