a dividend based trading strategy that might be of interest
The strategy works like this:
1. identify stocks that have dividend dates coming up
2. buy shares in the stocks prior to the dividend date
3. sell in the money calls on the same shares for the nearest dividend day. So today you'd sell april 2009 calls.
The potential beauty of this trade is that you collect the dividend, which is taxed to a lower degree than income from a normal trade, and you can also make money on the trade itself over quite a broad range of share prices. The sale of the in-the-money call gives you considerable shelter from losing money if the shares drop. Lets look at some examples
XL Capital. Imagine XL's dividend record date was next week. To execute the trade you would
A) buy sahres of XL, say 100 shares for the heck of it. At close today XL shares were $6.01. So that costs you $601 + transaction costs
B) sell in-the-money calls on the shares you just bought (in this trade you WANT the shares to get called from you). We'll pick the $5 strike price calls selling for $1.30.
C) collect the $0.10 dividend.
Now the outcome of this trade is this: if XL closes above $5 on april 17th, the shares will get called away from you. Your profit will be $0.39. $0.29 of this is normal income $0.10 is dividend income. Your total investment was $4.71. So thats a return of 8% or so in 1-4 weeks, which is extremely good if it can consistently be done. If XL closes between $4.71 and $5 on april 17th you will make >>closing price - $4.71<< plus the dividend. If XL closes at $4.61 you break even in cash, but you get a tax benefit as the dividend (profit) is taxed at a lower rate than the $0.10 loss on the trade. If XL closes under $4.61 you will take a loss. But, if XL closes under $4.61, all isn't lost. You can sell another $5 call on it, lowering your basis price again, and hope that it clears $5 by the may options day. Rinse, repeat, rinse, repeat.
Lets look at another company with a good dividend. BP closed at $41.72. The dividend is $0.84, and lets assume the dividend record date is next week. So buy the shares as close to the record date as possible, 100 shares for $4,172. The sell a call on those sharse thats in the money, in this case we'll select the $35 call which pays $6.80. If BP closes above $35 on april 17th the shares will be called from you and your profit will be $0.92 ($0.84 dividend + $0.08 from the optiosn trade). Your total investment was $34.92, so this represents about a 3% profit in 1-4 weeks.
The risks intrinsic to this trade are that the stock drops well below the strike price of the call. This risk can be mitigated by selling calls that are well in the money. For example, sell the $2.50 call on XL or the $30 call on BP in the examples above. That will typically be lower profit, but will be lower risk.
I don't know what the ultimate money making potential of this strategy is, but it seems like an interesting strategy overall with some promise.
Good luck to anybody who's long!