By Robert Weinstein
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.
A requirement I have is to 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).
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 needed over intrinsic value.
My last step (completed before making a trade on the same day) is to check company announcements, and news sources for possible price moving events. This is especially critical during earnings season.
The Gap Inc. (NYSE:GPS) is a global specialty retailer which operates stores selling casual apparel, personal care and other accessories for men, women and children under the Gap, Banana Republic and Old Navy brands. The company designs virtually all of its products, which in turn are manufactured by independent sources, and sells them under its brand names. The company was founded in 1969 and is headquartered in San Francisco, California. The Gap Inc. trades an average of 5.3 million shares per day with a market cap of $17.6 billion.
Dividend Amount: 13 cents
Ex-Dividend Date: October 5, 2012
Strategy: Buy The Gap stock and offer to sell the October $34 strike or lower call for 53 cents 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 42.93 cents, plus dividend.
With the yield of The Gap only 1.39%, as much or more of the gain should be coming from the option premium, otherwise it does not make sense to me to try to execute this trade.
If my shares are called away before trading ex-dividend (resulting from the option buyer wanting the dividend), I gain about 53 cents. The most I can make is 66 cents if I hold the covered call through option expiration day and the stock gets called away.
SYSCO Corporation (NYSE:SYY) is the largest North American distributor of food and food related products to the foodservice or "food-prepared-away-from-home" industry. The company provides its products and services to restaurants, healthcare and educational facilities, lodging establishments and other foodservice customers. The company was founded in 1969 and is headquartered in Houston, Texas. Sysco trades an average of 2.4 million shares per day with a market cap of $17.9 billion.
Dividend Amount: 27 cents
Ex-Dividend Date: October 03, 2012
Strategy: Buy Sysco stock and offer to sell the October $30.00 strike or lower call for 22 cents 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 attempt to close out the trade with a gain of near 14 cents, plus dividend.
If my shares are called away before trading ex-dividend (resulting from the option buyer wanting the dividend), I gain about 22 cents. The most I can make is 49 cents if I hold the covered call through option expiration day and the stock gets called away.
I use a proprietary blend of technical analysis, financial crowd behavior and fundamentals in my short-term trades, albeit 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. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.