Dividend capture with covered calls
- Thread starter madbrain
- Start date
Rationalize,
Thanks ! Well, those were the prices I was getting from Optionsxpress virtual trading last night when I wrote the post.
I wouldn't be doing this with margin. Cash account only. The total cost is limited to what I would pay for the stock , less what I would collect for the call. No interest involved. Ideally, this would be done over just 3 days.
Buywrite on day 1, collect dividend on day 2, unwind the position on day 3.
The problem seems to be the spreads on day 3 that would negate the gains on day 2.
However there is not a huge risk in holding the position for longer. Maybe for a couple quarters, or one year. And continue collecting the dividends. Until the time premium is lower, or the spreads narrow enough. The main risk would be if the underlying drops below strike.
Of course, the trade is much less attractive as a long-term one than short-term.
Thanks ! Well, those were the prices I was getting from Optionsxpress virtual trading last night when I wrote the post.
I wouldn't be doing this with margin. Cash account only. The total cost is limited to what I would pay for the stock , less what I would collect for the call. No interest involved. Ideally, this would be done over just 3 days.
Buywrite on day 1, collect dividend on day 2, unwind the position on day 3.
The problem seems to be the spreads on day 3 that would negate the gains on day 2.
However there is not a huge risk in holding the position for longer. Maybe for a couple quarters, or one year. And continue collecting the dividends. Until the time premium is lower, or the spreads narrow enough. The main risk would be if the underlying drops below strike.
Of course, the trade is much less attractive as a long-term one than short-term.
Yes put is greater than 0. In the $5 range.
As of right now SPY is at 124.08. The Dec23 $70 call is $54.62 bid / $55.48 ask . The spread widened, and is now greater than projected dividend.
For a longer term trade, one could use a call with lower strike. However it seems those are trading below intrinsic value at the bid, right now....
I actually used to do this strat in the 90's and 2k's with higher paying div stocks. You could see the volume right before the exdate because everyone on the floor was doing it as well and hoping to no get assigned.
If the put side is greater then 0 then most likely you will not get assigned.
A definite risk is market risk. SPY gaps lower you lose 3 points, div is only .60 cents and because it has moved closer to the strike the call only goes down 2 dollars. .40 loss
Interesting. In the case of SPY, dividend isn't high. So getting assigned is actually even better
True. But it goes both ways. If SPY moves up and the gap stays the same, it is in your favor. You won't profit from the upside, but it increases the odds of getting called early and collecting time premium, too.
Short tem, the spread will kill it. Long term, the interest you *forego* will. You're funding the guy on the other side remember.
Net net nothing, but I like your thinking.
Better then the average ET directional voodoo magic punter.
Rationalize,
What interest would I be foregoing ? The 1%/year I would get in my FDIC insured accounts otherwise ? It doesn't look like this will change much over the next 2 years.
If my outlay is $70 and I collect $2.4 over one year, that's 3.5% for the first year, a lot better than 1% . And a lot of downside protection, all the way down to SPY at $70. That's over 40% protection. Yes, I know, it happened in march 2009, could happen again.
What interest would I be foregoing ? The 1%/year I would get in my FDIC insured accounts otherwise ? It doesn't look like this will change much over the next 2 years.
If my outlay is $70 and I collect $2.4 over one year, that's 3.5% for the first year, a lot better than 1% . And a lot of downside protection, all the way down to SPY at $70. That's over 40% protection. Yes, I know, it happened in march 2009, could happen again.
Briefly .. you're assuming the call delta remains at 1 on the way down.
And, because you're getting screwed on the FDIC insured overnight rate, it "looks" like you're forgoing less interest. Match the terms.
How wide was the spread you pay to get out? I think that may be a significant factor.
Still, good thinking in terms of the mechanics. Have you thought about working for a bank?
Rationalize,
True.
But if I hold the call to expiration and, as I believe, it expires in the money (SPY > $70), then it doesn't matter. I would pocket a little extra time premium when shares get called, ie. dividend #9
.
My guess is, I'm more likely to get called before the 2 years are up, at the first notable temporary SPY uptick. Then I pocket the time premium early on. But no more dividends.
Well, a 2 year CD at Ally is 1.19%. Prepayment penalty is 60 days interest or 0.2%. Not sure if there are better deals out there. My cash is mostly split in 3 different money market at different institutions, each earning around 1%.
Yes. It depends on the underlying price. Right now, it would be about 80 cents or about 1.1%. Definitely more than the CD. This spread could move up or down, though.
Thanks No, I haven't really. I make decent money writing code. And being a night owl, doubt very much I could survive working banking hours. I think even if they paid me $1M salary I would have to turn it down as I know my limits.
True.
But if I hold the call to expiration and, as I believe, it expires in the money (SPY > $70), then it doesn't matter. I would pocket a little extra time premium when shares get called, ie. dividend #9
.My guess is, I'm more likely to get called before the 2 years are up, at the first notable temporary SPY uptick. Then I pocket the time premium early on. But no more dividends.
Well, a 2 year CD at Ally is 1.19%. Prepayment penalty is 60 days interest or 0.2%. Not sure if there are better deals out there. My cash is mostly split in 3 different money market at different institutions, each earning around 1%.
Yes. It depends on the underlying price. Right now, it would be about 80 cents or about 1.1%. Definitely more than the CD. This spread could move up or down, though.
Thanks
No, I haven't really. I make decent money writing code. And being a night owl, doubt very much I could survive working banking hours. I think even if they paid me $1M salary I would have to turn it down as I know my limits.