Many companies offer quarterly (or more often) dividends to shareholders. This can be a great source of income and with each dividend payment received, investors are able to lower their risk in an investment. The one requirement to receive a dividend from a company is to be a shareholder on the day of record for the dividend.
Using a call option to hedge against downward price risk is my favorite dividend capture strategy. I have found I must be highly selective in the companies selected.
ManpowerGroup (NYSE:MAN) provides workforce solutions and services worldwide. The company was founded in 1948 and is headquartered in Milwaukee, Wisconsin.
- Yield: 2.2%
- Dividend Amount: $0.43
- Ex-Dividend Date: May 30, 2012
- Beta: 1.76
Buy Manpower stock and offer to sell the June $25.00 strike or lower call for $0.37 over the intrinsic value. I selected Manpower for the yield and possible gain in writing a covered call. The options are very thin, so I would not hold my breath. At the same time, Manpower appears ready to move higher following a tough couple of weeks.
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 attempt to close out the trade with a gain of near $0.11, plus the dividend earned.
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. A requirement I have is the ability 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).
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 $0.37 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 $0.37. The most I can make is $0.80 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.
Regal Entertainment Group (NYSE:RGC), through its subsidiaries, operates a theater circuit in the United States. The company was founded in 2002 and is based in Knoxville, Tennessee.
- Yield: 5.73%
- Dividend Amount: $0.21
- Ex-Dividend Date: June 01, 2012
- Beta: 0.94
If you are bullish on Regal Entertainment, buy the June $12.50 strike or lower call for $0.10 over the intrinsic value. Instead of trying to gain the dividend, we use the dividend's impact on options to gain advantage.
First you must be bullish with Regal Entertainment. If so, buying the $12.50 strike makes more sense up to May 30th, the day before Regal Entertainment trades ex-dividend. Options are superior to the stock because the premium decay will be very low to zero. Instead of risking $1,250 for 100 shares, the total at risk for the same control is about $215.
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, and no plans to initiate any positions within the next 72 hours.