Darden Restaurants Fat Dividend Capture With An Option Hedge

| About: Darden Restaurants, (DRI)

Darden Restaurants, Inc. (NYSE:DRI)

Yield: 3.71%

Dividend Amount: $0.43

Ex-Dividend Date: January 06, 2012

Beta: 0.88

Darden Restaurants operates full service restaurants in the United States and Canada. It operates restaurants under the Red Lobster, Olive Garden, LongHorn Steakhouse, The Capital Grille, Bahama Breeze and Seasons 52 brand names. The company was founded in 1968 and is headquartered in Orlando, Florida.

There are many dividend capturing strategies, and I have used more than one. Using a call option to hedge against downward price risk is my favorite strategy. I have found I must be highly selective in the companies selected. An average holding period is about three weeks, and sometimes longer.

In this article we will go over an upcoming dividend with Darden Restaurants 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 Darden Restaurants stock and after checking company updates, offer to sell the January $30.00 strike call for $0.82 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 $0.44.

If I hold the position until option expiration day and Darden stays above $30 I will have my stock called away for a gain of $1.25. Otherwise, if the stock is called away early (day before ex-dividend) I make $0.82 per share. For this investment to work, I need Darden to trade above $30. With such a huge margin of error and lack of option trading volume, I will also look at the $40, $42, and $43 strike prices to hedge with.

The current trailing twelve months (TTM) P/E ratio is 14.3. The forward P/E ratio is 12.7. The current book value per share is 13.00.

For the same fiscal period year-over-year, revenue has improved to $7.50 billion for 2011 vs. $7.11 billion for 2010. The bottom line has rising earnings year-over-year of $476.30 million for 2011 vs. $404.50 million for 2010.The company's earnings before interest and taxes are rising with an EBIT year-over-year of $741.20 million for 2011 vs. $637.50 million for 2010. Rising revenue along with rising earnings is a very good sign and what we want to see with our companies. Be sure to check the margins to make sure that the bottom line is keeping up with the top line.

At $45.13, the price is currently below the 200 day moving average of 47.49, and below the 60-day moving average of 45.80.

From a month ago, the stock has decreased in price -0.22%, with a change from a year ago of -1.24%.

When comparing to the S&P 500, the year to date difference is -0.91%.

Remember, you must buy a stock at least three business days before the record date (at least one business day before the ex-dividend date) to qualify for a dividend.

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 research the different call options and calculate the expected probabilities based on Beta, Bid, Offer, Volume traded the current day, open interest, and time value/implied volatility. The options offer some level of protection from down moves in the stock, and provide revenue to cover the times that the options do not fully cover down moves in the stock. Income is not needed from the option premiums, so a break even from premiums received/stock losses ratio is a win.

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. Nothing in the article should be considered investment advise, but 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 DRI over the next 72 hours.

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