NEW YORK ( TheStreet) -- In this article, I cover three dividend captures and two stocks that you will want to consider buying call options on instead of buying the stock.Like most investing, there is no free lunch on Wall Street, but if you get there early they sometimes provide breakfast. Dividend capturing can be used to capture multiple dividends by retaining the stock and option longer than three months. For sellers of option contracts, theta (time decay of option premium) is their greatest friend, and for buyers, the cruelest enemy. Options are a decaying asset, much like milk; using an option hedge while holding a stock can be profitable, even if the stock doesn't move higher. This is especially true in higher-yielding stocks, since higher-yield options have lower time premiums, all else being equivalent. Also, the longer I retain a covered-call position (like two weeks with a front-month option, for example) the lower the time premium is worth (all else being equal). A requirement I have is to 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 object to an early exercise notice (which does happen from time to time, but is profitable if everything is done according to plan). 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. 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 learning 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. Qualcomm (QCOM) QCOM data by YCharts
Qualcomm develops and delivers innovative digital wireless communications products and services based on the company's CDMA digital technology. The company was founded in 1985 and is headquartered in San Diego, California. Qualcomm trades an average of 8.4 million shares per day with a marketcap of $5 million. Yield: 1.6% Dividend Amount: 25 cents Ex-Dividend Date: Sept. 5 Beta: 1.00 Strategy: Buy Qualcomm stock and offer to sell the September $60 strike or lower call for 45 cents over the intrinsic value. I don't want the option hedge unless the sale will provide at least the minimum 45 cents over 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 30 cents, plus dividend. With a yield of 1.6%, as much or more of the gain should come from the option premium, otherwise it doesn't make sense to me to try to execute this trade. If my shares are called away before trading ex-dividend (resulting from the option buyer wanting the dividend), I gain about 45 cents. The most I can make is 70 cents if I hold the covered call through option expiration day and the stock gets called away.
Johnson Controls is a global market leader in automotive systems and facility management and control. The company was founded in 1885 and is headquartered in Milwaukee. Johnson trades an average of 5.7 million shares per day with a marketcap of $5 million. Yield: 2.67% Dividend Amount: 18 cents Ex-Dividend Date: Sept. 5 Beta: 1.81 Strategy: Buy Johnson Controls stock and offer to sell the September $26.00 strike or lower call for 37 cents over the intrinsic value. I will attempt to close out the trade with a gain of near 21 cents, plus dividend. If my shares are called away before trading ex-dividend (resulting from the option buyer wanting the dividend), I gain about 37 cents. The most I can make is 55 cents if I hold the covered call through option expiration day and the stock gets called away.
Frontier is a full-service communications provider and one of the largest rural local exchange telephone companies in the country. Frontier trades an average of 11.3 million shares per day with a marketcap of $5 million. Yield: 8.58% Dividend Amount: 10 cents Ex-Dividend Date: Sept. 5 Beta: 0.74 Strategy: Frontier's dividend skews the premium for options because of the relatively large yield. This sets up an opportunity for those that are bullish with Frontier. Buy the September $4 call for 7 cents or less above the intrinsic value. The carrying cost is about half a cent per day with a very high delta. Total possible risk is about 70 cents with no upside limit on profit. After breaking above the 200 day moving average, Frontier appears ready to make another leg up for those willing to take on a riskier position. At the time of publication, the author held no positions in any of the stocks mentioned. This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.