7 Dividend-Capture Ideas Using an Option Hedge
NEW YORK (TheStreet) -- Quarterly dividends can be a great source of income. With each dividend payment received, investors are able to lower their risk. Investors need to be a shareholder on the day of record for the dividend. To qualify as a shareholder of record you must buy the stock before it trades ex-dividend and keep it until the ex-dividend date.
Using call options for hedging is one of my favorite and easy-to-understand methods of capturing gains through options and dividends. This method can be used to capture more than one option by holding them longer than three months.
I sorted by highest yield first and
Ares Capital (ARCC) - Get Report
is the highest with a yield of over 9%. Ares Capital is a credit-focused private investment adviser.
Yield: 9.74%
Dividend Amount: 37 cents
Ex-Dividend Date: June 13, 2012
Beta: 1.79
Strategy:
Buy Ares Capital stock and sell the June $15.00 strike or lower call for 25 cents over the intrinsic value. I sell the call option first to ensure the stock option leg is complete.
The option strike has an encouraging open interest over 800.
When learning a new trading strategy, it is better to use a
first.
Stockpickr
is a great tool to practice new strategies and learn about the market. I use
Stockpickr
and recommend it. It is easy to make mistakes when starting out on a new strategy and mistakes cost a lot less with a simulated account. After a level of confidence is built, then it may be time to move into a real money account.
It is important to sell the call option hedge at or near the asking price for at least the minimum amount over intrinsic value. I don't want the option hedge unless the sale will provide at least the minimum 25 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 25 cents. The most I can make is 62 cents if I hold the covered call through option expiration day and the stock gets called away.
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.
Digital Realty Trust (DLR) - Get Report
Digital Realty provides a wide range of data center solutions and consultation, including building, buying, managing, and data center outsourcing services.
Yield: 4.19%
Dividend Amount: 73 cents
Ex-Dividend Date: June 13, 2012
Beta: 1.06
Strategy:
Buy Digital Realty Trust stock and sell the June $70.00 strike or lower call for $1.46 over the intrinsic value. I will look to close out the covered option with a gain of about 65 cents, plus the quarterly dividend paid by the company.
The most I can make is $2.19 if I hold the covered call through option expiration day and the stock gets called away.
T. Rowe Price Group (TROW) - Get Report
T. Rowe Price Group, Inc. is a publicly owned asset management holding company.
Yield: 2.34%
Dividend Amount: 34 cents
Ex-Dividend Date: June 12, 2012
Beta: 1.61
Strategy:
Buy TROW stock and sell the June $50.00 strike or lower call for 56 cents over the intrinsic value.
The option may get exercised early for a gain. If not, after qualifying for the dividend I will attempt to close out the trade with a gain of near 20 cents, plus dividend.
If my shares are called away before trading ex-dividend (resulting from the option buyer wanting the dividend), I gain about 56 cents. The most I can make is 90 cents if I hold the covered call through option expiration day and the stock gets called away.
Eastman Chemical (EMN) - Get Report
Eastman Chemical, a chemical company, engages in the manufacture and sale of chemicals, plastics, and fibers.
Yield: 2.27%
Dividend Amount: 26 cents
Ex-Dividend Date: June 13, 2012
Beta: 1.97
Strategy:
Buy Eastman Chemical stock and sell the June $35.00 strike or lower call for 75 cents over the intrinsic value. I will attempt to close out the trade with a gain of near 32 cents, plus dividend.
XL Group (XL) - Get Report
XL Group, through its subsidiaries, provides insurance and reinsurance.
Yield: 2.16%
Dividend Amount: 11 cents
Ex-Dividend Date: June 13, 2012
Beta: 2.43
Strategy:
Buy XL Group stock and sell the June $20.00 strike or lower call for 60 cents over the intrinsic value. I will attempt to close out the trade with a gain of near 26 cents, plus dividend.
If my shares are called away before trading ex-dividend (resulting from the option buyer wanting the dividend), I gain about 60 cents. The most I can make is 71 cents if I hold the covered call through option expiration day and the stock gets called away.
Comerica (CMA) - Get Report
Comerica, through its subsidiaries, provides financial products and services.
Yield: 2.04%
Dividend Amount: 15 cents
Ex-Dividend Date: June 13, 2012
Beta: 1.21
Strategy:
Buy Comerica stock and sell the June $29.00 strike or lower call for 79 cents over the intrinsic value.
After qualifying for the dividend, I will attempt to close out the trade with a gain of near 23 cents, plus dividend.
If my shares are called away before trading ex-dividend (resulting from the option buyer wanting the dividend), I gain about 79 cents. The most I can make is 94 cents if I hold the covered call through option expiration day and the stock gets called away.
Motorola Solutions (MSI) - Get Report
Motorola Solutions provides communication infrastructure, devices, software and services.
Yield: 1.84%
Dividend Amount: 22 cents
Ex-Dividend Date: June 13, 2012
Beta: 1.63
Strategy:
Buy Motorola Solutions stock and sell the June $46.00 strike or lower call for 95 cents over the intrinsic value. I will look to close out the covered option with a gain of about 50 cents, plus dividend.
The most I can make is $1.17 if I hold the covered call through option expiration and the stock gets called away.
Ecolab (ECL) - Get Report
Ecolab develops and markets programs, products, and services for the hospitality, food service, health care, industrial and energy markets.
Yield: 1.24%
Dividend Amount: 20 cents
Ex-Dividend Date: June 15, 2012
Beta: 0.69
Strategy:
Buy Ecolab stock and sell the June $62.50 strike or lower call for $1.08 over the intrinsic value. I will look to close out the covered option with a gain of about 45 cents, plus dividend.
If my shares are called away before trading ex-dividend (resulting from the option buyer wanting the dividend), I gain about $1.08. The most I can make is $1.28 if I hold the covered call through option expiration day and the stock gets called away.
DISCLOSURE: Author does not hold a position in any stock mentioned.
