This Day On The Street
Continue to site
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

Buying GM or Huntsman? Know Your Options

NEW YORK (TheStreet) -- Have you heard of dividend-capturing strategies? It's a two-part strategy based on dividend distributions.

An investor times the purchase of a stock before the ex-dividend date and owns it for as little as one day. The subsequent part is selling said stock for at least as much as what you paid for it. It's not easy to do and price fluctuations can make it downright unprofitable. In theory, a stock should open up on the ex-dividend date lower than the previous day's close by an amount equal to the dividend.

Options are often used in an attempt to mitigate price fluctuation risk. An investor wanting to hedge against a price decline may sell a deep-in-the-money call hoping the option will move in lockstep with the underlying stock price. Unfortunately, dividends are priced into options, making it difficult to find an option with enough time premium that the buyer won't be motivated to exercise before the ex-dividend date.

Another approach is to take the other side and buy a cheap call option for a stock you already want to buy. If you already want to buy a stock that is highly liquid -- meaning it trades at least a million shares a day -- and also pays a dividend, it pays to check the stock options to see if it's advantageous to gain exposure through an option instead of the stock.

Take General Motors (GM - Get Report) as an example. GM's next expected dividend payment is 30 cents, and the next ex-dividend date is March 14. At $36.60 a share, the annualized yield is about 3.25%.

An investor can buy the shares for $36.70 and assume the full risk of the position or as an alternative, buy a March $33 strike call for about $3.70. The call will move up almost perfectly with the stock and down at a sliding scale rate. In other words, you receive all the upside potential, but if GM drops $3 tomorrow, the option may only lose $2.10.

The option doesn't expire until March 21 but the ex-dividend date is March 14, so if the option is in-the-money, it may be in the option owner's best interest to exercise or sell the option on March 13. Maybe you're not interested in owning the stock but are hoping to profit from stock appreciation into an ex-dividend date.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

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
Stocks Under $10

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

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

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
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
GM $30.53 -0.20%
HUN $14.56 -1.00%
FB $117.80 -0.22%
GOOG $701.26 0.80%
TSLA $211.34 -5.00%


Chart of I:DJI
DOW 17,660.71 +9.45 0.05%
S&P 500 2,050.63 -0.49 -0.02%
NASDAQ 4,717.0940 -8.5450 -0.18%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs