Inflatable Dividends Service

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DISCLAIMER

I do not use the Inflatable Dividends investment strategy for my personal investing, and I don't recommend using it. I find the strategy too risky for my investing, since it is possible to get locked into a falling stock if the call option can't be bought back. (For my personal investing, I use Dividendium's Options Trading Service.)

Overview

The Inflatable Dividends Service looks to pump up the returns on Dividend Capture trades. The service does this by finding the most profitable combinations of covered calls and dividend stocks each day.

A recent example is PFG (Principal Financial Group). On 10/30/2009, the stock closed at $25.04. The stock was due to pay a dividend of $0.50 on 11/10/2009. If you bought the stock on 10/30 and held it for the dividend, that would be a return of ($0.50/$25.04) 1.99%.

But Inflatable Dividends would tell you to also sell the call option expiring on 11/20/2009 with a strike price of $25 for $1.45. Doing this brings your total investment in the stock down to ($25.04 - $1.45) $23.59, which would be a new return of ($0.50/$23.59) 2.12%. That's a 6% increase in the return on the dividend capture.

Inflatable Dividends finds these kinds of trades every day. And options expire once every month, or 12 times per year. So this same type of trade could be done 12 times per year with the same funds. So instead of getting $0.50 once per year, you'd be getting it 12 times per year for a total of $6 per year. That's an annual return of ($6/$23.59) 25.43%.

Specifics

The example above only highlights the general idea of a covered call dividend capture play. There are a number of other factors to consider when putting on one of these trades.

Premium

The intention of this investment is to capture the value of the dividend on or before the ex-dividend date. This can be done either by owning the stock on the ex-dividend date, or by selling our call so that if it gets exercised we receive a time premium greater than or equal to the quarterly dividend. The time premium is the amount greater than the intrinsic value of the call.

The intrinsic value is the strike price plus the call price, or the price of the stock. Which ever is lower. To find the time premium, subtract the price of the stock from the sum of the strike price and the call price. In the example above, the value of the time premium is (($25 strike + $1.45 call) - $25.04 stock) $1.41. So if the person who you sold the call to decides to exercise that call, then that person is going to lose $1.41 in value. The person would be paying ($25 + $1.45) $26.45 to receive a $25.04 stock. But that stock is actually a ($25.04 stock + $0.50 dividend) $25.54 stock the day before the ex-dividend. If the combined cost of the option and exercise is less than $25.54, then it would be worth it for the owner of the call to exercise and collect the dividend.

Inflatable Dividends makes sure that the time premium is more than the value of a quarterly dividend, so that you will get at least the value of the quarterly dividend for that stock.

Stock Price Movement

It's important to understand how the price of the stock will affect the price of your position.

If the stock goes up $1, the value of the call will most likely go up some smaller amount, like $0.80. Since you sold the call and would have to buy it back to get out of the position, an increase in the call's price is a negative to you. So net, your position went up ($1-$0.80) $0.20 in this case. Eventually, if the stock goes high enough the call will move up $1 for every $1 that the stock goes up, so you would not be gaining anything more on the position. The stock going up reduces the amount of time premium in the call and could result in you getting exercised early. This is a good thing. It means you got paid the value of the dividend even faster than you expected and can now go put on another position in a different stock.

If the stock goes down $1, the value of the call will most likely go down some smaller amount, like $0.60. So your net change would be (-$1+$0.60) -$0.40. As long as the price of the stock stays above the strike price of the call option, you will get called on the expiration date.

Risk

The risk in this trade is that the current stock price falls below the amount you have in the trade. So in the example above, if the price of the stock falls below $23.59 before 11/20, you would be losing money. You want to make sure there is a large enough "cushion" between the amount you have invested and the current stock price that you don't think the stock will fall down that far before the option expires.

You shouldn't put everything you have into one trade. And you should always have a pre-defined stop-loss point where you would get out if it went that low.

There is also a possibility that if the stock takes a sudden down turn in price that you might have difficulty unwinding the trade. To get out of this trade before option expiration you have to buy back the call option. Normally this isn't a problem, but because call options have a lower liquidity than stocks, it is possible to get stuck and be unable to buy back the call option immediately when you want to.

Inflatable Dividends Trade Specifics Example

The data for each inflatable dividend trade is completely laid out for each trade with an explanation of the basic trade idea and an explanation of each data point. This convenient location of all the data makes it quick and easy to decide if this is a trade you want to play.

Example Inflatable Dividend Trade Specifics

How to Subscribe to Inflatable Dividends

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Immediately after subscribing you will be taken to the current Inflatable Dividends data. You should also immediately receive an email with the most recent data from contact@dividendium.com.

After that initial email, you'll receive a daily email after the close of the market with the most recent data. The data is available via webpage or via a downloadable spreadsheet. And the spreadsheets are archived on the website in case you want to do back testing or any other research.

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