The Gap Stock Call Option Dividend Capture

Mar.14.12 | About: The Gap, (GPS)

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. 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.
There are many dividend capturing strategies, but using a call option to hedge against downward price risk is my favorite strategy. I have found I must be highly selective in the companies selected.

The Gap, Inc. (NYSE:GPS) operates as a specialty retailing company. The company offers apparel, accessories, and personal care products for men, women, children, and babies under the Gap, Old Navy, Banana Republic, Piperlime, and Athleta brand names. The company was founded in 1969 and is based in San Francisco, California.

The Gap Inc.
Yield: 2%
Dividend Amount: $0.13
Ex-Dividend Date: April 03, 2012
Beta: 1.23

Here is a look at the fiscal year revenue.
paid2trade.com revenue gross bar chart for GPSClick to enlarge

I generally hold any given position with a yield of 2% and dividend of $0.13 for about 10 days depending on the timing of the option expiration date and the day of the week of the ex-dividend. 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. The Gap 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 The Gap stock and after checking company updates, offer to sell the April $23.00 or lower strike call for $0.39 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 $0.14, 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 $0.39 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 $0.39 Not all that great, but not bad for about a week of owning the stock. The most I can make is $0.52 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 GPS over the next 72 hours.