Vale (ADR) Dividend Capture Using Call Options for Profit ($VALE)

I setup EDGAR online screener to find stocks paying a dividend soon.
I don’t want to look at all the stocks that pay a dividend so I filtered the results based on the following:

Options available Dividend amount over $0.08 cents (I understand that many retail traders can not make money with an $0.08 dividend due to transaction costs, but most pros can ) Active volume to avoid paying a large spread to leg in and out.

In this article we will go over an upcoming dividend 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). This is one of my favorite and easy to understand methods of making gains through options and dividends. 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.

Vale (ADR) (VALE) Yield: 6.88%
Dividend Amount: $0.39
Ex-Dividend Date: October 17, 2011
Beta: 1.61

In combination with my buying the stock and after checking company updates, offer to sell the October $23.00 strike call for $0.52 over the intrinsic value. The option may get exercised early for a gain. If not, after qualifying for the dividend, I will want to close out the trade near break even.

The P/E ratio has been discounted, as the current trailing twelve months (ttm) P/E ratio is 7.8, while the forward P/E ratio is now 4.9. An upside earnings report may put a lot of wind in the sails. The current book value per share is 16.29.
The company has rising revenue year-over-year of $45.29 billion for 2010 vs. $23.31 billion for 2009. The bottom line has rising earnings year-over-year of $17.26 billion for 2010 vs. $5.35 billion for 2009. The company’s earnings before income and taxes are rising with an EBIT year-over-year of $21.70 billion for 2010 vs. $6.06 billion for 2009.

At $25.12, the price is currently below the 200 day moving average of 31.15, and below the 60 day moving average of 27.03.
In the last month, the stock has decreased in price -5.90%, with a one year change of -21.29%.
Compared to the S&P 500, the year to date difference is -24.00%.

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. I use Seeking Alpha, Edgar Online, and Yahoo Finance for most of my data.

People also view

Leave a Reply

Your email address will not be published. Required fields are marked *