7 Dividend Captures Using an Option Hedge

NEW YORK (TheStreet) -- Many high-quality companies offer quarterly dividends to investors. Dividends may be a great source of income. What's more, with each dividend payment received, shareholders are able to lower their cost in an investment. The most important requirement to receive a dividend is to be a shareholder on the required day of record.

Here are seven dividend-paying stocks to play using options as a hedge against downward price risk:

Expeditors International of Washington (EXPD) provides logistic services in the United States and internationally.

Expeditors International
Yield: 1.44%
Dividend Amount: $0.28
Ex-Dividend Date: May 30, 2012
Beta: 0.88

Strategy:Buy Expeditors International stock and offer to sell the June $37.50 strike or lower call for 92 cents over the intrinsic value.

The option may get exercised early for a gain. In almost all cases, I sell the call option first to ensure the stock option leg is complete. If not, after qualifying for the dividend, I will look to close out the covered option with a gain of about 34 cents, plus the dividend received.

When learning a new trading strategy, it is better to first use a simulated trading account. 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; 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.

The criteria I use is that I must be able to sell a call option in either the front, or first back month that is in the money, and with enough premium that I will not mind getting exercised early (which happens often and can be a good thing if the trades are executed correctly).

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 92 cents over intrinsic value.

If my shares are called away the day before trading ex-dividend (resulting from the option buyer wanting the dividend), I gain about 92 cents. The most I can make is $1.20, 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 events that may cause the stock price to move. This is especially critical during earnings season.

ICICI Bank Limited (ADR) (IBN) provides various banking and financial services in India and internationally.

ICICI Bank
Yield: 2.02%
Dividend Amount: $0.62
Ex-Dividend Date: May 30, 2012
Beta: 2.12

Strategy:Buy ICICI Bank Limited (ADR) stock and offer to sell the June $24.00 strike or lower call for 36 cents over the intrinsic value.

The option may get exercised early for a gain. In almost all cases, I sell the call option first to ensure the stock option leg is complete. If not, after qualifying for the dividend, I will attempt to close out the trade with a gain of near 11 cents, plus the dividend earned.

If my shares are called away the day before trading ex-dividend (resulting from the option buyer wanting the dividend), I gain about 36 cents. The most I can make is 98 cents, if I hold the covered call through option expiration day and the stock gets called away.

Qualcomm (QCOM)
Yield: 1.6%
Dividend Amount: $0.25
Ex-Dividend Date: May 30, 2012
Beta: 0.99

Strategy:Buy Qualcomm stock and offer to sell the June $60.00 strike or lower call for $1.02 over the intrinsic value.

In almost all cases, I sell the call option first to ensure the stock option leg is complete. If not, after qualifying for the dividend, I will look to close out the covered option with a gain of about 77 cents, plus the dividend received.

With the yield of Qualcomm only 1.6%, as much or more of the gain should be coming from the option premium, otherwise it does not make sense to try to execute this trade.

Schlumberger (SLB)
Yield: 1.58%
Dividend Amount: $0.28
Ex-Dividend Date: May 30, 2012
Beta: 1.36

Strategy:Buy Schlumberger stock and offer to sell the June $60.00 strike or lower call for 92 cents over the intrinsic value.

The option may get exercised early for a gain. In almost all cases, I sell the call option first to ensure the stock option leg is complete. If not, after qualifying for the dividend, I will look to close out the covered option with a gain of about 34 cents, plus the dividend received.

Oceaneering International (OII)
Yield: 1.46%
Dividend Amount: $0.18
Ex-Dividend Date: May 30, 2012
Beta: 1.55

Strategy:Buy Oceaneering International stock and offer to sell the June $50.00 strike or lower call for $2.82 over the intrinsic value.

I will look to close out the covered option with a gain of about $1.03, plus the dividend received. I don't want the option hedge unless the sale will provide at least the minimum $2.82 over intrinsic value.

If my shares are called away the day before trading ex-dividend (resulting from the option buyer wanting the dividend), I gain about $2.82. The most I can make is $3.00, if I hold the covered call through option expiration day and the stock gets called away.

PepsiCo (PEP)
Yield: 3.22%
Dividend Amount: $0.54
Ex-Dividend Date: May 30, 2012
Beta: 0.49

Strategy:Buy PepsiCo stock and offer to sell the June $65.00 strike or lower call for 36 cents over the intrinsic value. I will attempt to close out the trade with a gain of near 11 cents, plus the dividend earned.

Kellogg Company (K)
Yield: 3.38%
Dividend Amount: $0.43
Ex-Dividend Date: May 30, 2012
Beta: 0.45

Strategy:Buy Kellogg Company stock and offer to sell the June $50.00 strike or lower call for 44 cents over the intrinsic value.

The option may get exercised early for a gain. In almost all cases, I sell the call option first to ensure the stock option leg is complete. If not, after qualifying for the dividend, I will attempt to close out the trade with a gain of near 13 cents, plus the dividend earned.


In June, Rocco Pendola and I will have a live Webinar and I will demonstrate how to initiate a dividend capture trade. Details are on my blog and Rocco's newsletter page.

At the time of publication, Weinstein held no positions in equities mentioned in this piece.

More from Options

Amazon's Stock Is Facing a Major Test

Amazon's Stock Is Facing a Major Test

Here's a Better Way to Hedge Using Stock Options

Here's a Better Way to Hedge Using Stock Options

Let the Najarian Brothers Crash-Proof Your Portfolio

Let the Najarian Brothers Crash-Proof Your Portfolio

Let the Najarian Brothers Help You Generate Income With Options

Let the Najarian Brothers Help You Generate Income With Options

Learn Options Trading from the Najarian Brothers, the Best in the Business

Learn Options Trading from the Najarian Brothers, the Best in the Business