Option-Hedged Dividend Capture For JPMorgan Chase

Dec.28.11 | About: JPMorgan Chase (JPM)

JPMorgan Chase & Co. (NYSE:JPM)

  • Yield: 3.03%
  • Dividend Amount: $0.25
  • Ex-Dividend Date: January 04, 2012
  • Beta: 1.23

JPMorgan Chase & Co., a financial holding company, provides various financial services worldwide. The company was founded in 1823 and is headquartered in New York, New York.

There are quite a few dividend catching techniques, and I have utilized many. For the most success, an investor must be willing to own longer term in the companies as well. Once in a while things do not go as planned and the price drops. When this happens, as it will if you try to capture a dividend enough times, I am always happy that I limit my investing to companies worth owning.

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 in my experience, the option decay can provide a return. This is especially true in lower-yielding stocks. I have found that three weeks is about the amount of time I carry any given position.

In this article we will go over an upcoming dividend with JPMorgan Chase 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).

Strategy

In combination with my buying JPMorgan Chase stock and after checking company updates, offer to sell the January $32.00 strike call for $0.90 over the intrinsic value. The option may get exercised early for a gain. In almost all cases I will sell the call option first to ensure the stock option leg is complete first. If not, after qualifying for the dividend, I will attempt to close out the trade with a gain of near $0.27.

The current book value per share is 47.98. The bottom line has rising earnings year-over-year of $17.37 billion for 2010 vs. $11.73 billion for 2009. At $32.78, the price is currently below the 200 day moving average of 37.91, and above the 60 day moving average of 32.33. Looking at the price movement over the last month, the stock has moved higher in price 15.65%, and moving in price -22.59% from one year ago. When comparing to the S&P 500, the year to date difference is -22.62%.

Remember, you 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.

Do you have a company you want me to review? Do you want to read more dividend capturing related articles? Let me know in the comments below.

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. You may want to use this article as a starting point of your own research with your financial planner.

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