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
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Buying GM or Huntsman? Know Your Options

Stocks in this article: GM HUN

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) 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

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!

Markets

DOW 17,959.44 +154.64 0.87%
S&P 500 2,078.55 +7.90 0.38%
NASDAQ 4,781.4240 +16.0440 0.34%

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
Top Rated Stocks Top Rated Funds Top Rated ETFs