CVS Caremark Dividend Capture With Stock Options

| About: CVS Health (CVS)

With a review one may find many stocks worth investing in offering dividends. Also, dividends can be a very good and steady source of revenue and with each dividend payment received, investors continue to lower the original risk.

I'm interested in dividend capturing primarily for the dividend, but there is also a chance the price could fall enough that I end up owning it for longer than planned. As a result, I must be sure this is a company I would not mind holding on to for a while. If I am not willing to own a dividend paying company if the price falls, I will pass and move on to one I will be happy holding. There are many dividend capturing tactics, and I have executed trades in my quest for dividends in various ways. I will describe one of my favorite and easy to understand methods of making gains through options and dividends. All while knowing if the shares fall in price, I will be comfortable owning shares for a longer period.

CVS Caremark Corporation (NYSE:CVS) provides pharmacy healthcare services in the United States. The company was founded in 1892 and is headquartered in Woonsocket, Rhode Island.

Yield: 1.44%
Dividend Amount: $0.16
Ex-Dividend Date: April 19, 2012
Beta: 0.79

Here is a look at the fiscal year revenue.
(Click to enlarge) revenue yearly gross bar chart for CVS

I review many call strikes and estimate the expected probabilities based in part on Beta, Bid, Offer, Volume traded the current day, open interest, and time value/implied volatility. Call options offer some protection from possible adverse moves in the stock price and provide offset revenue when the options do not fully cover down moves in the stock. Income is welcomed, but not needed from option premiums, so a break even from option premiums received/stock losses ratio is a win.

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, it may be time to move into a real money account. CVS Caremark's upcoming stock dividend appears to be attractive and worth the time and effort to capture. 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).


In combination with my buying Caremark stock and after checking company updates, offer to sell the April $43.00 or lower strike call for $0.43 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 look to close out the covered option with a gain of about about $0.16, plus the dividend received. 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 will not want to try putting on the hedge unless the sale of the option (hedge) will provide at least the full $0.43 over intrinsic value. If my shares get called away the day before they trade ex-dividend as a result of the option buyer wanting the dividend I will make about $0.43. Not all that great, but not bad for about a week of owning the stock. The most I can make is $0.59 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 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, but may initiate a long position in CVS over the next 72 hours.

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