Rent Colgate-Palmolive For Free Instead of Buying

NEW YORK (TheStreet) - New York-based Colgate-Palmolive (CL) made a new 52-week high last week, and if you're not long you may want to take another look. I'm going to show you how to capture all the upside without exposing your portfolio to all the risk.

Colgate-Palmolive, together with its subsidiaries, manufactures and markets consumer products worldwide. You may know the company for its toothpaste products, but it markets a wide range of products including pet supplies. It's stock, currently trading around $65, is down nearly 1% for the year to date.

CL Chart

Colgate-Palmolive hit my radar because of several factors. Strong revenue growth, dividends increase 300% during the last 10 years, bottom-ling earnings per share that support a rising stock price, and the company is about to distribute a fat dividend.

The company pays an oversized yield of 2.25% and the next ex-dividend date is April 17. Others may buy shares, but I'll show you another strategy to profit if the stock moves higher between now and the ex-dividend date. By using options and specifically in-the-money call options, investors can rent Colgate-Palmolive for almost free until April 16.

Call options give the buyer the right but not the obligation to buy a stock within a set period of time at a set price. Many factors influence the price of options including the underlying price, implied volatility, time until expiration, and interest rates, and dividend payments. I posted a Real Money Pro trade idea for Colgate-Palmolive for your review if you want exact entry and exit points.

CL Revenue (Quarterly) Chart


In the right situation, high-yield stock call options have remarkably little or no time premium, even when they may not expire for a week or more. For more active investors exploiting option strategies, it enables the ability to capture essentially all the upside movement while limiting risk and often paying zero or a nominal amount in time decay.

Option buyers have much lower price movement risk than shareholders. For example, if you're already interested in buying Colgate-Palmolive, and you pay $64.73 a share, you can lose the entire amount. No one thinks that will happen, but it's a small possibility. 

On the other hand, if you buy an April $60 call for $4.80, your total risk is the same as the option premium, $4.80 per share. However, if the shares climb in front of the ex-dividend date, the option will appreciate at the same or nearly the same amount. If the stock climbs to $70, the call option will be worth at least $10. The option must continue higher as the stock rises because the option owner can exercise at any time.

The free ride ends the day before the stock trades ex-dividend. That is the time to either sell or exercise the option as long as it remains in-the-money. The reason has to do with expected loss if an in-the-money call option with little or no time premium is held until the ex-dividend date. It's beyond the scope of this article, but it's an important decision making date if the time premium is less than the dividend amount.

If you want to capture the dividend and buy the shares, the day before it trades ex-dividend is the ideal time. Otherwise, if you're ready to move on, just sell the option and take any gains made. Since high-yield stocks tend to rise in front of an ex-dividend date, all else being equal, this may be a time to take a close examination of Colgate-Palmolive.

At the time of publication, Weinstein had no positions in securities mentioned.

Follow @RobertWeinstein

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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