(Example Inflatable Dividend Trade Specifics from close of market 2007-4-20)

Inflatable Dividend Specifics

Stock Data
Symbol1: FRO
Close2: $35.37

Option Data
Option3: GFEHX.X
Expiration Date4: 2007-08-17
Days To Expiration5: 118
Call Strike6: $22.50
Call Bid7: $15.60
Call Premium8: $2.73
Call Premium Equation9: $15.60 + $22.50 - $35.37

Dividend Data
Annual Dividend10: $10.00
Dividends Per Year (estimated)11: 4
Dividend Payment (estimated)12: $2.50
Dividend Payment Equation13: $10.00 / 4

Predicted Dates And Amounts14
6/8/2007 (Estimated) $2.50 (Estimated)

Historical Dates And Amounts15
3/6/2007 (Exact) $4.74 (Exact)
12/5/2006 (Exact) $2.50 (Exact)
8/29/2006 (Exact) $1.50 (Exact)
6/8/2006 (Exact) $1.50 (Exact)
3/2/2006 (Exact) $1.50 (Exact)
11/25/2005 (Exact) $1.50 (Exact)
9/1/2005 (Exact) $2.00 (Exact)
6/8/2005 (Exact) $3.10 (Exact)
3/3/2005 (Exact) $3.50 (Exact)

Returns
Simple Return16: 12.65%
Simple Return Equation17: ($2.50) / ($35.37 - $15.60) * 100
Annualized Return18: 39.12%
Annualized Return Equation19: 12.65 / 118 * 365

Risk
Suggested Stop Loss20: $19.77
Suggested Stop Loss Equation21: $35.37 - $15.60
Suggested Stop Loss With Dividend22: $17.27
Suggested Stop Loss With Dividend Equation23: $35.37 - $15.60 - ($2.50)

Explanation of Data
1 The symbol of the underlying stock to be purchased.
2 The most recent closing price for this stock.
3 The symbol of the call option to be sold.
4 The date the call option expires.
5 The number of days until the call option expires.
6 The strike price of the call option. If the price of the stock is above this amount on the expiration day then the stock will be called away.
7 The most recent bid offer to buy this call option.
8 The difference between buying the stock or buying a call option and exercising it at the strike price. This is the amount that a call option buyer is paying extra for the option. This is also called a time premium because the closer it is to the expiration date, the smaller this amount will be.
9 The equation used to calculate the call premium.
10 The amount paid by this stock in dividends over a year.
11 The number of dividends projected to be paid per year. This number is estimated from the historical dividend data listed for this stock on this page.
12 The estimated amount owed per share to the shareholder after the ex dividend date. This is calculated by taking the annual dividend and dividing by the estimated number of payments per year.
13 The equation used to calculate the dividend payment.
14 The projected dividend dates and amounts for this stock and this trade. The dates are projected forward from the historical dates and then moved forward to the first Monday if the initial projected date is on the weekend. The amounts are the estimated divided payment and are the same for each payment.
15 The historical dividend dates and amounts. This data is used to determine the frequency that dividends are paid (monthly, quarterly, etc.).
16 The percent return on the money invested. This is calculated by dividing the sum of the dividends expected by the amount invested, which is the cost of the stock minus the proceeds from selling the call. This does not include commissions.
17 The equation used to calculate the simple return.
18 The percent return on the money invested on an annual basis. The annualized return is useful for comparing investments with different time horizons. This is calculated by dividing the simple return by the number of days to expiration, to get the return per day, and then multiplying by 365 to get a year's worth of returns. This does not include commissions.
19 The equation used to calculate the annualized return.
20 The price the stock has to fall to before expiration to cause a loss. This number assumes no dividends were paid. It is a conservative stop loss.
21 The equation used to calculate the suggested stop loss.
22 The price the stock has to fall to before expiration to cause a loss, but including all dividends. This is a liberal stop loss because it assumes that dividends will be received later that may not if the stock falls too far and is sold before those dividends are distributed.
23 The equation used to calculate the suggested stop loss with dividends included.

Overview of the Trading Method
The basic idea of this trade is to buy a dividend stock, sell a call against the stock, and collect the dividend. Because selling a call against the stock lowers the amount of money you have in the trade, this actually increases your return on that money.

The risks in this trade are that the stock could fall in price or the company could decide not to continue to pay dividends as it has in the past, and could either reduce the dividend or stop paying dividends altogether. If the stock falls in price below the strike price of the option, then we recommend that you get out of the position with a small loss to prevent a further loss. To get out of the position you will have to first buy back the call and then sell the stock, which means you would no longer be eligible for the dividend.

The profit from this trade could come in two ways. If the stock goes up in price so much that the call premium becomes less than the amount of a single dividend payment, then the stock will most likely get called away right before the next ex-dividend date. This is good because it means you get to keep the call premium and you got it in less time than you would have otherwise, thus increasing your annualized yield. Then you can put that money back to work again some where else. The other way of profiting is just holding the position until the option expires and collecting the dividends while you do.