In thinking of new strategies, I thought of a strategy in which you would buy 100 shares of a stock that is coming near its ex-div date. You would then collect the dividend and sell a covered call, your choice of strike price and whether it is ITM, ATM, or OTM . Therefore you would receive the dividend (somewhere between 5-10%) and sell a covered call which could be another 5-25% estimated, depending on strike price. The covered call would be in the current expiration month. Any cons to this strategy? has anyone done this before?
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Dividend and Covered Call Strategy - the best?
- Thread starter StockHustler
- Start date
Unless you have favourable tax treatment there is no edge in this strategy beyond the usual "edge" of selling covered calls.
An ex-div stock declines in value by an amount equal to the dividend (the 5-10% in your example). Dividends are also factored into the valuation of options. After an ex-div date either the valuation of the option will shift upwards or the strike price will shift downwards (depending on the exchange / contract), negating the stock price drop. So whilst the call value will still decay with time as per normal, the ex-div component will not accelerate your p/l growth in the way you seem to assume.
An ex-div stock declines in value by an amount equal to the dividend (the 5-10% in your example). Dividends are also factored into the valuation of options. After an ex-div date either the valuation of the option will shift upwards or the strike price will shift downwards (depending on the exchange / contract), negating the stock price drop. So whilst the call value will still decay with time as per normal, the ex-div component will not accelerate your p/l growth in the way you seem to assume.
Quote from RhinoTrader:
Unless you have favourable tax treatment there is no edge in this strategy beyond the usual "edge" of selling covered calls.
An ex-div stock declines in value by an amount equal to the dividend (the 5-10% in your example). Dividends are also factored into the valuation of options. After an ex-div date either the valuation of the option will shift upwards or the strike price will shift downwards (depending on the exchange / contract), negating the stock price drop. So whilst the call value will still decay with time as per normal, the ex-div component will not accelerate your p/l growth in the way you seem to assume.
Be careful about ITM options the day before ex-date.
, but probably not the way people think. If someone think that an ITM call option is overvalued on the day before ex-dividend, that individual would probably get sticked.Dividends are also factored into the valuation of options
There are better ways to play dividend. Dividend is one of the plays where you can find some free money because people do not understand it correctly.
Quote from StockHustler:
In thinking of new strategies, I thought of a strategy in which you would buy 100 shares of a stock that is coming near its ex-div date. You would then collect the dividend and sell a covered call, your choice of strike price and whether it is ITM, ATM, or OTM . Therefore you would receive the dividend (somewhere between 5-10%) and sell a covered call which could be another 5-25% estimated, depending on strike price. The covered call would be in the current expiration month. Any cons to this strategy? has anyone done this before?
Just do not buy a stock because it gives a huge dividend.
A covered call does not protects the downside of a stock that lays a golden egg. You get the dividend , but most likely you will lose more in stock values in this market. These dividend paying stocks are not market leaders but outfits that keep investors enticed into being investors for the wrong reasons.
Quote from RhinoTrader:
Unless you have favourable tax treatment there is no edge in this strategy beyond the usual "edge" of selling covered calls.
An ex-div stock declines in value by an amount equal to the dividend (the 5-10% in your example). Dividends are also factored into the valuation of options. After an ex-div date either the valuation of the option will shift upwards or the strike price will shift downwards (depending on the exchange / contract), negating the stock price drop. So whilst the call value will still decay with time as per normal, the ex-div component will not accelerate your p/l growth in the way you seem to assume.
Any dividend over 10% of stock value and option contracts are adjusted by Options council. You do not benefit anything.