Pfizer Dividend Capture With A Call Option Hedge

| About: Pfizer Inc. (PFE)

Many companies offer quarterly (or more often) dividends to shareholders. This can be a great source of income 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 from a company is to be a shareholder on the day of record for the dividend.

Finding a needle in a stock option haystack- every week I go through upcoming ex-dividend dates and compare the dividend, yield, strike prices, trading volume, relative stock risk, and option premium to find stocks that may be good candidates for a dividend capture strategy.

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.

Pfizer Inc. (NYSE:PFE) is a biopharmaceutical company which produces prescription medicines for humans and animals worldwide. The company was founded in 1849 and is headquartered in New York, New York.

Pfizer Inc. (NYSE:)
Yield: 4.02%
Dividend Amount: $0.22
Ex-Dividend Date: February 01, 2012
Beta: 0.73

In this article we will go over an upcoming Pfizer 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).

A combination of buying Pfizer stock and selling the February $21.00 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. 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 from the option premium. Not all that great, but not bad for about a week of owning shares.

The most I can make is $0.38 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 9.6. The forward P/E ratio is 9.53. The current book value per share is 11.71.
The company has rising revenue year-over-year of $67.81 billion for 2010 vs. $50.01 billion for 2009. The bottom line has falling earnings year-over-year of $8.26 billion for 2010 vs. $8.64 billion for 2009.The company's earnings before interest and taxes are falling with an EBIT year-over-year of $9.42 billion for 2010 vs. $10.83 billion for 2009.

At $21.85, the price is currently above the 200 day moving average of 19.80, and above the 60 day moving average of 20.55.
Looking at the price movement over the last month, the stock has moved higher in price 0.32%, and changing from last year at this time 20.07%.
When comparing to the S&P 500, the year to date difference is -3.24%.

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 advice, 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 PFE over the next 72 hours.