Dividend Capture: Chesapeake Energy, Abbott Labs

NEW YORK ( TheStreet) -- Many high-quality companies offer quarterly dividends to investors. Dividends may be a great source of income because with each payment shareholders can lower their investment cost, as long as they are shareholders on the required day of record.

With my portfolio, although much of the gains will come from dividends, the option decay will provide a big part of my gains. Option decay, or Theta, is the loss in time premium between two dates. This is especially true in lower-yielding stocks because higher-yield options have lower-time premiums, all else being equal.

Remember, the longer a covered-call position is held (like two weeks with a front-month option, for example), the lower the time premium is worth when it's time to cover (all else being equal).

Consider:

Chesapeake Energy Corporation (CHK)

Chesapeake Energy is an independent oil and gas company, was founded in 1989 and is based in Oklahoma City, Okla.

Yield: 1.93%

Dividend Amount: 9 cents

Ex-Dividend Date: July 12, 2012 Beta: 1.26

Strategy: Buy Chesapeake Energy stock and offer to sell the July $16.00 strike or lower call for 22 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 8.2 cents, plus dividend.

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 22 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 22 cents. The most I can make is 31 cents if I hold the covered call through option expiration day and the stock gets called away.

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

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.

Chesapeake is another energy victim of lower natural gas prices. They are not alone, but they are in need of possibly selling off a lot more assets. Another major player in the nat gas space is Sandridge Energy ( SD).

Unlike Chesapeake, Sandridge doesn't pay a dividend.

If you liked this article you might like

Fight Off Complacency: Cramer's 'Mad Money' Recap (Fri 9/15/17)

Alibaba, Qorvo, Abbott Laboratories, Square: 'Mad Money' Lightning Round

Apple Is the Tom Brady of Stocks: Cramer's 'Mad Money' Recap (Thursday 8/31/17)

Boeing, Pure Storage, Activision Blizzard: 'Mad Money' Lightning Round