Lexmark International Stock Option Hedged Dividend Capture

| About: Lexmark International, (LXK)

If you take a look you will find lots of companies worth owning that offer quarterly (or more often) dividends to shareholders. This can be a wonderful source of investor revenue and with each dividend payment received; investors are able to lower their risk in an investment. The basic requirement to receive a dividend is to be a shareholder on the day of record.

Investors can read about many dividend capturing strategies, most of them work better on paper than they do in practice. With the gains made, I am able to stop out and take a loss with the few that do not work as planned. 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.

Lexmark International (NYSE:LXK)

Yield: 4.22%
Dividend Amount: $0.30
Ex-Dividend Date: May 30, 2012
Beta: 1.14


Buy Lexmark International stock and offer to sell the June $28.00 strike or lower call for $0.72 over the intrinsic value.

The option may get exercised early for a gain. In almost all cases, I sell the call option first to ensure the stock option leg is complete. If not, after qualifying for the dividend, I will look to close out the covered option with a gain of about $0.19, plus the quarterly dividend paid by the company.

Large yield stocks like Lexmark International at 4.22% often attract a lot of interest in dividend capturing so the option premium may be hard to get.

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 Lexmark International 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).

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 don't want the option hedge unless the sale will provide at least the minimum $0.72 over intrinsic value.

If my shares are called away the day before trading ex-dividend (resulting from the option buyer wanting the dividend), I gain about $0.72. The most I can make is $1.02 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 critical during earnings season.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in LXK over the next 72 hours.