NEW YORK (TheStreet) -- Wouldn't it be fantastic if you could buy a high-yielding stock the day before trading ex-dividend and sell it the next day for the same price while still receiving the dividend?
Since stocks started trading on exchanges, investors have looked for ways to do just that. Because a stock, in theory, should begin trading at the previous day's close minus the dividend payment on the ex-dividend date (on the day the owner is no longer entitled to the next dividend payment) investors didn't think there was an advantage.
Newer strategies became available when options became popular along with falling transaction costs. With the advent of sub-penny per share and sub-dollar option trading costs, new trading strategies became available. By simultaneously buying a stock and selling an in-the-money call option, investors hoped to be able to get their cake and eat it, too. They sell a call option to hedge against price movements in the stock.
The technique became popular enough that the term "dividend capturing" was coined to describe the practice.
Dividend capturing is a strategy I use and, while it's not perfect or risk free, when executed properly under the right conditions does provide an edge. The problem for most people is that it isn't executed properly.
The market is efficient and most of the time the option sale doesn't provide enough premium to warrant the trade. In fact, sometimes enough investors are trying to capture a dividend and offer enough call options for sale that they drive the option price low enough that option becomes "too cheap" and they create a different opportunity for someone to take the other side.
Options already have dividend payments calculated into their "normal" fair market value, but when aggressive dividend capture option sellers tilt the scales too far, it becomes advantageous for to buy an option instead of the underlying stock.
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