Paychex Dividend Capture With A Call Option Hedge

| About: Paychex, Inc. (PAYX)

If you take a look you will find lots of companies worth owning offer quarterly (or more often) dividends to shareholders. This can be a wonderful source of investor revenue and with each dividend payment received, investors are able to lower their risk in an investment. Many investors will buy a stock in part because of the dividend and the current yield. The one basic requirement to receive a dividend payout from a company is to be a shareholder on the day of record for the dividend.

Investors can read about many dividend capturing strategies, most of them work better on paper than they do in practice. I tried just about everything over the years, and I learned quickly it is better to use a sim account first. I generally hold the position for about three weeks. Now I use a few methods that produce consistent results. With the gains made, I am able to stop out and take a loss with the few that do not work out as planned. Covered call dividend capturing is an easy-to-understand method of making gains with dividend capturing. I use options to partially hedge my carry risk during the time needed to qualify for the dividend. 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. Paychex, Inc. (NASDAQ:PAYX) provides payroll, human resource, and benefits outsourcing solutions for small- to medium-sized businesses

Paychex, Inc.

Yield: 3.96%

Dividend Amount: $0.32

Ex-Dividend Date: January 30, 2012

Beta: 0.85

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 possible 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 option premiums received/stock losses ratio is a win.

I generally hold any given position for about three weeks. Now I use a few methods that produce consistent results. With the gains made, I am able to stop out and take a loss with the few that do not work out as planned. When learning a new trading strategy it is better to use a simulated trading account first. 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. In this article we will go over an upcoming dividend with Paychex 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).


In combination with my buying Paychex stock and after checking company updates, offer to sell the February $32.00 strike call for $0.16 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 $0.05 plus the dividend received.

It is important to sell the call option hedge at or near the asking price for at least the minimum amount over intrinsic value. I will not want to try putting on the hedge unless the sale of the option (hedge) will provide at least the full $0.16 over intrinsic value. If my shares get called away the day before they trade ex-dividend as a result of the option buyer wanting the dividend I will make about $0.16. Not all that great but not bad for about a week of owning the stock. The most I can make is $0.48 if I hold the covered call through option expiration day and the stock gets called away.

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. Learn more about stock options by clicking here.

The current trailing twelve months P/E ratio is 21.7. The forward P/E ratio is 21.35. The current book value per share is 4.30.

Revenue year-over-year has increased to $2.08 billion for 2011 vs. $2.00 billion for 2010. The bottom line has rising earnings year-over-year of $515.30 million for 2011 vs. $477.00 million for 2010.The company's earnings before interest and taxes are rising with an EBIT year-over-year of $786.40 million for 2011 vs. $724.80 million for 2010.Rising revenue along with rising earnings is a very good sign and what we want to see with our companies. Be sure to check the margins to make sure that the bottom line is keeping up with the top line.

At $32.33, the price is currently above the 200-day moving average of $29.40, and above the 60-day moving average of $29.65.

The stock has moved higher in price 8.24% in the last month, with a change from a year ago of -0.37%.

The stock is performing a little better than the overall market with a slight relative gain. When comparing to the S&P 500 (NYSEARCA:SPY), the year-to-date difference is 2.60%.

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.

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 advise, but 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 PAYX over the next 72 hours.