trading strategies for options on dividend stocks

Dividend Capture Strategy

Dividend Stocks and Options

A Covered Put off Dividend-Capture Scheme

For investors in the stock exchange now, one good way to safely objective dividend income is through a barnacled commit dividend-capture strategy.

A covered put on dividend-capture strategy involves using an option called a set up to capture a dividend patc also mitigating the loss experienced from the fall in stock price.

The key to this strategy is the put option. A put is an legal instrument that gives the buyer the right, merely not the obligation, to sell a Malcolm stock at a predetermined price and within a specific time. For instance, if you have a stock with a price of $50 and you are concerned about it falling in value, you could buy a put that would protect you from some downside risk.

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How Does a Dividend-Capture Strategy Work?

Let's imagine you own 100 shares in a stock with a price of $50 per share. You recently bought the stock because it is getting ready to pay out a $0.50 per percentage dividend in three days. Stock prices usually fall connected the passe-dividend date, in astronomical part because of the automatic price adaption that occurs on ex-dividend dates. Once the investor captures that dividend, they can sell the put and the stock itself on the ex-dividend date.

Hedging Put on the line in a Captured Dividend Strategy

Investors hard to pursue a dividend-capture strategy need to protect themselves against the risk of the pedigree price falling on the ex-dividend date.

In ordinate to hedge against this risk and still capture the dividend, you buy a put option where the delta would be high on the day the stock price drops. A key point is this live part of the strategy – an option with a high delta.

Delta is the ratio of the modification in the price of an plus to the change in the price of the derivative. For puts, deltas drift from -1.0 to 0.0. For instance, if a stock's lay out has a delta of -0.7 then that way a $1 increment in stock damage will decrement put value away $0.70. Frankincense, a put with a high delta is one where its value is solitary significantly influenced by the fall in price of the store.

In practice, this agency an option that has little time value versus its intrinsic value. The time value of the alternative is the selection's value in excess of the difference between the well-worn price and the option's fall price. If the stock is trading at $48.40 and the put alternative's strike price is $50 then the intrinsic value is $1.60 ( $50 – $48.40 = $1.60 ). If the assign option sells for $2 then the note value is $0.40 ( $2 – $1.60 = $0.40 ).

Investors looking for swollen-delta puts should start by looking at short-datable put options, which have little time remaining and low enough excitability that a dividend-consanguineal terms decline is a circumstance.

Once the investor has found an piquant option to complement the $50 stock, it's time to put the scheme into move. On the exwife-dividend date of the $0.50 dividend, the investor has three factors that will work his or her profitableness:

The $0.50 dividend – a fixed and unchanging benefit to the investor.

The turn down in the stock Price – this could range from no change in the stock price to a decline in price equal to the chockablock $0.50 dividend – assuming no other negative influences on stock price of course.

The increase in note value of the put away pick, which is adequate to the commit's delta multiplied away the price decline. A delta of -0.8, for instance, leads to a rise in the value of the put option by $0.40 for a $0.50 decline in stock price ( -$0.50 * -0.8 = $0.40 ).

The increase input value at least partially offsets the fall back in the price of the stock. The investor is left with the dividend but little other risk.

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Exiting the Investment

Once the investor has reached the ex-dividend engagement and is entitled to the dividend, the investor posterior exit the position. Having reached the ex-dividend date, the investor will experience the dividend, so the only leftover parts are the put option and the stock itself.

The investor should sell the neckcloth and the put itself. Ideally, the profit from the jump in the value of the put choice should be match to the give value of the stock. Owning the timeworn and cast for the long term would expose one to evidentiary risk that is not part of the dividend-capture effort so it does not ready sense to hold the stock beyond the ex-dividend date stamp. As you are a dividend-capture strategian, you wouldn't want to own the position for a agelong time.

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The Bottom Bloodline

While a strategy this complicated mightiness non be a good fit for everyone, it is an attractive option for investors who are interested in a downhearted-risk way to trance dividends. The key to with success implementing this strategy is finding a dividend double sufficiency to justify the trading be for both the set down and the gunstock and, of line, finding a dominating-delta put.

A dividend-capture strategy can as wel be pursued using calls, though that is outside the scope of this article. Look for much information almost this approach in a rising piece.

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