Dividend Capture using Covered Calls

Quote from scottiet:

-- Can someone explain if this holds water? --

QUOTE FROM YOUR LINK:

"On the day before ex-dividend date, you can do a covered write by buying the dividend paying stock while simultaneously writing an equivalent number of deep in-the-money call options on it. The call strike price plus the premiums received should be equal or greater than the current stock price....

On ex-dividend date, assuming no assignment takes place, you will have qualified for the dividend. While the underlying stock price will have drop by the dividend amount, the written call options will also register the same drop since deep-in-the-money options have a delta of nearly 1. You can then sell the underlying stock, buy back the short calls at no loss and wait to collect the dividends
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Here's a real time example. LO was bid $80.68 just before the close on Weds. Of the Dec, Jan and Mar 65, 70 and 75 calls, only the March 75c was trading above parity with a bid of $6.50 (delta of .74) thereby meeting the author's requirement.

This morning it went ex-div by $1 and with LO at $78.38, it was down $1.30 from selling pressure (the missing $ was was from the div)

Multiply $1.30 by its delta of .74 and you would expect the bid of the Mar 75c to drop 96 cts to $5.54 and guess what, it's at $5.50 now.

IOW, stock drops $2.30 but only $1.38 is true drop because stock owner gets $1.00 dividend. ITM call did not drop $2.38 as link author suggested but only $1.00 ... 38 ct dfference is due to delta.

As stated by several posters, dividends are priced in. The theory does not hold water.
 
Error correction for my previous post. Should read:

IOW, stock dropped $2.30 but only $1.30 is true drop because stock owner gets $1.00 dividend. ITM call did not drop $2.30 as link author suggested but only $1.00 ... 30 ct dfference is due to delta.
 
I used to do these trades (they do mostly work) but the yield hardly seems worth the effort.
e.g. WMT (54.63) is going to pay .29 in Dec. and something like it in March. If I sell a March 50 call on the stock my yield on the covered call is $52 plus the one dividend I can hope to collect before being called = 52+29 = $81. My holding time will be something like 100 days before I get called prior to the March dividend. So my yield = 81/4948 = 1.6% in 100 days or an annualized 5.7%.

For comparison:
My yield on a straight March 50/45 bull put spread is $59 with $441 cash secured or 59/441 = 13.3% or 43% annualized.

I believe the risk on the put spread is less than the risk on the covered call by virtue of the long put at 45.

Why would I do the covered call??
 
Quote from danshirley:

I used to do these trades (they do mostly work) but the yield hardly seems worth the effort.
e.g. WMT (54.63) is going to pay .29 in Dec. and something like it in March. If I sell a March 50 call on the stock my yield on the covered call is $52 plus the one dividend I can hope to collect before being called = 52+29 = $81. My holding time will be something like 100 days before I get called prior to the March dividend. So my yield = 81/4948 = 1.6% in 100 days or an annualized 5.7%.

For comparison:
My yield on a straight March 50/45 bull put spread is $59 with $441 cash secured or 59/441 = 13.3% or 43% annualized.

I believe the risk on the put spread is less than the risk on the covered call by virtue of the long put at 45.

Why would I do the covered call??
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Excellent question and I admit it puzzled me for a while. However, I think I can simplify the question which may lead to an answer..

A CC is the equivalent of a NP so your Bull Put Spread is equivalent to a CC plus the long $45 put. Since the cost of the $45 put is the same in both positions we can eliminate this $45 put and simply compare the price of the CC with the short $50 put.

Splitting the B/A prices I get the following closing prices.

WMT=$54.44
$50 call =$5
$50 put= 90 cents
Div=27 cents
So using the above prices the CC profit = 83 cents and the NP $50 = 90 cents.

Hey, the NP is 7 cents greater and the cost of carry is less. Has put-call parity been violated?

Two possibilities:
1) The very low int rates mean the cost of carry is very small maybe even zero.

2) There is a possibility that you can collect two dividends if the stock is below $50 on ex-div. I would guess that is the real answer to this question.

Anyway, that's my best guess.

Don
 
These dividend plays have a very small chance of paying out. After commissions and the edge that is given up, and the fact you need someone to "drop the ball" and forget to exercise, it’s mathematically a poor strategy in my opinion.
 
Quote from danshirley:

[If I sell a March 50 call on the stock my yield on the covered call is $52 plus the one dividend I can hope to collect before being called = 52+29 = $81. My holding time will be something like 100 days before I get called prior to the March dividend. So my yield = 81/4948 = 1.6% in 100 days or an annualized 5.7%.

For comparison:
My yield on a straight March 50/45 bull put spread is $59 with $441 cash secured or 59/441 = 13.3% or 43% annualized.

I believe the risk on the put spread is less than the risk on the covered call by virtue of the long put at 45. Why would I do the covered call?? [/B]
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ROI analysis is fairly useless for totally different strategies. And the spread risk is obviously much less since you can't lose more than the strike diff less premium received.
 
Hey Don. LTNS.

You lost me on this one. I don't see how you can eliminate the 45 put in both positions since there's no 45 put in the CC. Or did I miss something?

If anything, I think that you demonstrated that in this case, due to market forces, the NP offers a bit more premium than the CC.

As far as collecting 2 dividends goes, the B/S formula assumes that you will. It's all factored into the pricing.
 
The original question on this thread was about dividend capture using a covered call strategy. The definitive answer is that the dividends are already priced into the calls and therefore there is NO true dividend capture writing covered calls. IN all of the other examples you’re assuming additional risks in and not really getting anything over the risk free rate of return.
 
Quote from spindr0:

Hey Don. LTNS.

You lost me on this one. I don't see how you can eliminate the 45 put in both positions since there's no 45 put in the CC. Or did I miss something?

If anything, I think that you demonstrated that in this case, due to market forces, the NP offers a bit more premium than the CC.

As far as collecting 2 dividends goes, the B/S formula assumes that you will. It's all factored into the pricing.
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Spin,

I guess my note was confusing. I was focused on the put-call parity question and I inadvertently ignored the ROI question.

As far as ROI goes, I agree it can be misleading. However, in this case it suggests that the BP spread is superior and that sounds right to me.

Don
 
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