With a review one may find many stocks worth investing in offering dividends. Also, dividends can be a very good and steady source of revenue and with each dividend payment received; investors continue to lower the original risk.
There are numerous dividend capturing techniques, and I have utilized just about every method known. One of the most important aspects to success is limiting the stocks to only the very best candidates. Using call options for hedging is one of my favorite and easy to understand methods of capturing gains through options and dividends. This method can be used to capture more than one option by holding for longer than three months, or more.
ABB Ltd (ABB) provides power and automation technologies for utility and industrial customers worldwide. The company was founded in 1883 and is headquartered in Zurich, Switzerland.
Dividend Amount: $0.71
Ex-Dividend Date: May 1, 2012
I generally hold any given position with a yield of 3.56% and dividend of $0.71 for about 14 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.
In this article we will go over an upcoming dividend with ABB 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 ABB stock and after checking company updates, offer to sell the May $19.00 strike price or lower call for $0.3 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 $0.30 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 $0.30. The most I can make is $1.01 if I hold the covered call through option expiration day and the stock gets called away.
I couldn't enter a position without ABB being oversold in my opinion. Lately each day has opened with a gap lower, but followed by strong buying bringing the price above the open.
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.
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 ABB over the next 72 hours.