Option-Hedged Dividend Capture For FirstEnergy

Jan.23.12 | About: FirstEnergy Corp (FE)

Many high-quality companies offer quarterly dividends to investors. Dividends may be a great source of income; with each dividend payment received, shareholders are able to lower their cost in an investment. Many investors will buy a company in part because of the dividend and the current yield. The most important basic requirement to receive a dividend from a company is to be a shareholder on the day of record for the dividend.

I am interested in dividend capturing primarily for the dividend, but there is also a chance the price could fall enough that I end up owning it for longer than planned. So I must be sure this is a company I would not mind holding on to for a while. If I am not willing to own a dividend paying company if the price falls, I will pass and move on to one I will be happy holding.

There are many dividend capturing tactics, and I have used many. In this article I will describe one of my favorite and easy to understand methods of making gains through options and dividends. All while knowing if FirstEnergy (NYSE:FE) falls in price, I will be comfortable owning the stock for a longer period.

Firstenergy Corp. operates as a diversified energy company. The company was founded in 1996 and is headquartered in Akron, Ohio.

Yield: 5.3%

Dividend Amount: $0.55

Ex-Dividend Date: February 03, 2012

Beta: 0.45

I research and review many call options and estimate the expected probabilities based in part on Beta, Bid, Offer, Volume traded the current day, open interest, and time value/implied volatility. Call options offer some protection from possible adverse moves in the stock price and provide offset revenue when the options do not fully cover down moves in the stock. Income is welcomed, but not needed from 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 FirstEnergy Corp. 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 FirstEnergy Corp. stock and after checking company updates, offer to sell the February $41.00 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 look to close out the covered option with a gain of about $0.04 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 risk exposure.

The most I can make is $0.71 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 book value per share is 31.19. Revenue year-over-year has increased to $13.34 billion for 2010 vs. $12.97 billion for 2009. The bottom line has falling earnings year-over-year of $784.00 million for 2010 vs. $1.01 billion for 2009.The company's earnings before interest and taxes are falling with an EBIT year-over-year of $1.81 billion for 2010 vs. $1.88 billion for 2009.

At $42.06, the price is currently below the 200 day moving average of 43.32, and below the 60 day moving average of 43.89.

The stock has fallen in price -6.42% in the last month, with a one year change of 5.41%.

When comparing to the S&P 500, the year to date difference is -10.36%.

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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 FE over the next 72 hours.