By, Robert Weinstein
Background: Texas Instruments (TXN) Incorporated engages in the design and sale of semiconductors to electronics designers and manufacturers worldwide. The company was founded in 1938 and is headquartered in Dallas, Texas. Texas Instruments trades an average of 8.6 million shares per day with a market cap of $31 billion.
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.
Dividend Amount: 21 cents
Ex-Dividend Date: October 29, 2012
Strategy: Buy Texas Instruments stock and offer to sell the November $25.00 strike or lower call for 16 cents over the intrinsic value. A more aggressive approach is selling the $27 November calls for 65 or cents or more over the intrinsic value.
The option may get exercised early for a gain (especially the $25 strike). In almost all cases, I sell the call option first to ensure the stock option leg is complete. Texas Instruments has enough option liquidity with in-the-money calls that in the opening of trading, buying the stock first will probably work as long as the minimum amount needed is very close or at the bid.
When learning a new trading strategy it is better to use a simulated trading account first.
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 order for this strategy to be effective and provide a positive edge, you must 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 16 cents over intrinsic value.
If my shares are called away before trading ex-dividend (resulting from the option buyer wanting the dividend), I gain about 16 cents. The most I can make is 37 cents if I hold the covered call through option expiration day and the stock gets called away. Learn more about stock options by clicking here.
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.
How does Texas Instruments stack up against its peers and space? Really well. Every company that I looked at has a solid Quick Ratio (anything above 1 is considered relatively safe for the near term). Texas Instruments has a buy to sell ratio with analysts of 7 to 1.
|Moderate Buy Buy||14||28||3||10|
|Moderate Sell Ratings||1||1||1||0|
|Strong Sell Ratings||2||1||0||5|
|Avg Analyst Price Target||$30.58||$70.43||$6.66||$25.53|
|Revenue||13.04 billion||18.91 billion||8.65 billion||53.43 billion|
|1 Year Stock Price Change||-9.70%||9.79%||-15.85%||-7.73%|
I really like Intel (INTC) in this space. I have followed it for several years and as it trades closer to the 200 day moving average, the bargain hunters will emerge from the forest.
Intel boosts a yield over 4% and a payout ratio low enough that a dividend decrease appears unlikely for the foreseeable future.
I am bullish with Texas Instruments of course, but longer term Intel needs to be considered as well. Along with attempting to execute a dividend capture with Texas Instruments, I plan on selling December $21 and or $20 cash secured puts.
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.