Long term, conservative investors often prefer dividend stocks. Large cap dividend stocks are commonly very stable and provide quarterly cash payments. But, is there also value in trading options on dividend stocks. Technical analysis of some of these stocks is, frankly, boring. But, how about following fundamentals? How about gap trading when a piece of news affecting the stock hits the market? How about trading options on dividend stocks in anticipation of changes in fundamentals? What comes to mind here are mergers, acquisitions, and economy-driven changes in cash flow and stock value. A couple of examples might be Motorola and Best Buy.
Motorola was the maker of the communication devices going back to the walkie-talkie in World War II. It paid dividends for decades. Then, when it ceased to create sufficiently innovative products, it split up and Google purchased its mobility division for the patents. Trading options on dividend stocks of this sort is not really trying to outguess the market. Motorola was in trouble for some time and under pressure to find ways to use its patent base to create value for stockholders. Anyone holding call options on the company when the takeover by Google was announced did well.
Best Buy is the largest seller of consumer electronics in the USA. It has a foothold in China as well. However, the recession is catching up to the company and profits have lagged. Best Buy is closing stores and tightening its belt. This includes a cut in executive stock options. Trading options on dividend stocks of this sort can be profitable as well. There is talk of a buyout. However, the original owner is still far and away the majority shareholder and is probably not interested in selling his baby. Nevertheless stranger things have happened. Trading Best Buy as it closes stores could be profitable. In this case technical analysis should be useful as the store is not going out of business and investor sentiment may overshoot, either up or down.
When trading options on dividend stocks the anticipated dividend payment is always included in the option price. When there is an unexpected and large change in dividends it profits those who trade options on dividend stocks. And, when a successful company such as Apple decides to open its treasury and pay dividends for the first time it does two things for investors as well as smart options traders. The stock price may well go up based upon the precise value of anticipated dividend payments. The stock price may also respond to the knowledge that the company is now operating under a different set of rules. As in all stock trading, when trading options on dividends stocks it is important to do your homework, gain perspective and anticipate the market. Although dividend stocks may be favorites of the long term investor they can also provide profits for traders of stocks and stock options. As always we are not promoting the individual stocks listed above but rather offer this discussion as an example of thinking through stock trades.
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