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) 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 simulated trading account 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)

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)

 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)

 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)

 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)

 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)

 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)

 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.

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