There are many dividend capturing tactics, and I have used many. In this article we will go over an upcoming dividend that I may capture with a minimum amount of risk. The criteria that I use is that I must 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 mind getting exercised early (which happens often and can be a good thing if the trades are executed correctly). This is one of my favorite and easy to understand methods of making gains through options and dividends. Although much of the gains will come from dividends, it should be noted that in my experience, the option decay can provide a return. This is especially true in lower yielding stocks.
Freeport McMoRan (NYSE:FCX) - Investors have been rewarded with an increase of year-over-year revenue. Revenue reported was $18.98 billion for 2010 vs. $15.04 billion for 2009. The bottom line has rising earnings year-over-year of $4.27 billion for 2010 vs. $2.53 billion for 2009. The company's earnings before income and taxes are rising with an EBIT year-over-year of $9.07 billion for 2010 vs. $6.50 billion for 2009.
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Freeport-McMoRan Copper & Gold (FCX)
Dividend Amount: $0.25
Ex-Dividend Date: October 12, 2011
In combination with my buying the stock and after checking company updates, offer to sell the October $20.00 strike call for $0.48 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 $0.15. With an option premium above the dividend amount my desire is to have the stock called away two days before it becomes ex-dividend. Otherwise, If I do capture the dividend, I will enter a combination order to close out at any time I am able to with a $0.15 gain with the option for a combined gain of $0.40.
What makes Freeport an attractive stock for a dividend capture is the company appears to be in great shape if the stock moves lower than the strike price. Freeport has become oversold on the daily chart and recently broke through the downward trend.
Investors have been rewarded with an increase of year-over-year revenue. Revenue reported was $18.98 billion for 2010 vs. $15.04 billion for 2009. The bottom line has rising earnings year-over-year of $4.27 billion for 2010 vs. $2.53 billion for 2009. The company's earnings before income and taxes are rising with an EBIT year-over-year of $9.07 billion for 2010 vs. $6.50 billion for 2009.
At $34.42, the price is currently below the 200 day moving average of 45.96, and below the 60 day moving average of 44.66.
In the last month, the stock has decreased in price -27.57%, with a one year change of -26.33%.
Remember, you m must buy a stock at least three business days before the record date (at least one business day before the ex-dividend date) to qualify for a dividend.
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 options and calculate the expected probabilities based on Beta, Bid, Offer, Volume traded the current day, open interest, and time value/implied volatility. The options offer some level of protection from down moves in the stock and provide revenue to cover the times that the options do not fully cover down moves in the stock. Income is not needed from the option premiums, so a break even from premiums received/stock losses ratio is a win.
I use a proprietary blend of technical analysis, financial crowd behavior and fundamentals in my short-term trades, and while not totally the same in longer swing trades to investments, the concepts used are similar. Nothing in the article should be considered investment advice, but you may want to use this article as a starting point of your own research with your financial planner. I use Edgar Online and Yahoo Finance for most of my data.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in FCX over the next 72 hours.