Using Options With ENI

| About: ENI S.p.A. (E)

Here's a method allowing an upcoming dividend to be captured at essentially a zero risk. The criteria that I use is that I must be able to buy a put option in either the front or first back month with a strike price very close to the current trading price of the stock, and with low enough premium that I will be able to buy it for near the amount of the dividend or less. The idea with this method is that my downside is covered with the put option I buy and the put purchase is covered with the dividend I can receive. If the price of the stock moves higher I will be able to sell the stock for a profit, and if the stock moves lower I will be able to get out even.

Here's an example.

ENI S.p.A. (NYSE:E) yield: 7.17%
Dividend amount: $1.48
Ex-dividend date: September 19
Beta: 0.95

In combination with my buying the stock and after checking company updates, buy the $40 September put option with a time premium of $1.30 or less, based on a stock price that is equal to the strike price. As I am the buyer of the option I will be in control of when to exit the trade, and this can be a double edged sword. It is a double edged sword because I have at times watched the stock move up much higher, only to see it come back down again for me to end up at near break even. This method does require a decision on when to exit if it is not the last day of the option. Generally, if I can close out for four times the dividend amount and there is not a strong technical reason to stay long, I will take the gains and call it good. Using a profit target of four times the dividend is simply a judgement call that works for me and may not be the optimal, and I deviate from it as the chart indicates. The advantage to closing out sooner is the put is likely to have some value that I may be able to get, adding to my gain. Otherwise, if ENI has not moved up much, I simply sell it on option expiration day, and anything over $40 is my gain. If ENI is under $40 on option expiration day which is September 16, I put the stock to the writer of the option at the same price that I bought the stock for.

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 important during earnings season. I research the different call and put options and calculate the expected probabilities based on Beta, Bid, Offer, Volume traded the current day, open interest, and time value / implied volatility. Commissions other than the rate I pay (which is very low), and current market conditions which can change rapidly, are not factored into what I calculate as the minimum required trading edge to enter into a trade.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in E over the next 72 hours.

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