There are many dividend capturing strategies, but using a call option to hedge against downward price risk is my favorite. I have found I must be highly selective, I selected the following company, in part, based on the combination of gaining a relatively good option premium with dividend added on.
Valero Energy Corporation (NYSE:VLO) operates as an independent petroleum refining and marketing company. The company operates through three segments: Refining, Retail, and Ethanol. The company was founded in 1955 and is based in San Antonio, Texas.
Valero Energy Corp
Dividend Amount: $0.15
Ex-Dividend Date: February 13, 2012
Here is a look at the fiscal year revenue.
Click to enlarge
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.
I use a few methods that produce consistent results and covered calls have proven to provide gains when work and effort are applied. 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 Valero Energy 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 Valero Energy stock and after checking company updates, offer to sell the March $10.00 strike call for $0.31 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 $0.09, plus the dividend earned.
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 $0.31 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 $0.31. Not all that great, but not bad for about a week of owning the stock. The most I can make is $0.46 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.
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 VLO over the next 72 hours.