Seagate Technology Call Option Dividend Capture

Feb. 9.12 | About: Seagate Technology (STX)

Many high-quality companies offer quarterly dividends to investors. Dividends may be a great source of income, and with each dividend payment received, shareholders are able to lower their cost in an investment.

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 simulated account first. 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. One of my planning methods 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.

Seagate Technology Public Limited Company designs, manufactures, markets, and sells hard disk drives for enterprise, client compute, and client non-compute market applications worldwide. The company was founded in 1979 and is headquartered in Dublin, Ireland.

Seagate Technology PLC (NASDAQ:STX)

  • Yield: 3.79%
  • Dividend Amount: $0.25
  • Ex-Dividend Date: February 13, 2012
  • Beta: 2.25

Here is a look at the fiscal year revenue:

paid2trade.com revenue gross bar chart for STXClick 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. 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. 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.

Seagate Technology's upcoming stock dividend appears to be attractive and worth the time and effort to capture. A requirement: I have is 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 object to an early exercise notice (which does happen from time to time, but profitable if everything is done according to plan).

Strategy:

In combination with my buying Seagate Technology stock and after checking company updates, offer to sell the March $10.00 strike call for $0.43 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 $0.13, 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 $0.43 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 $0.43 Not all that great, but not bad for about a week of owning the stock. The most I can make is $0.68 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 STX over the next 72 hours.