Since a dividend-paying underlying typically drops by the amount of the dividend after the underlying hits its ex-date, has anyone considered a strategy where you buy the underlying a few days before the ex-date and simultaneously write deep ITM covered calls against your position?
Assuming your calls are deep enough ITM, your long position is hedged down to the option's strike price minus your call premium. OK case - you get assigned prior to the ex-date and eke out a small profit (call premium). Best case - you collect the dividend, and you get assigned near expiration. You make a larger profit because you get your premium and the dividend. Worst case: underlying goes BSC on you.. but hey.. no risk, no reward
Example: XYZ is trading at $60 a share and going ex 5 days from now with a dividend of $1.
You purchase XYZ and write calls expiring next month with a 50 strike at $10.30 each (premium is crap, because there's an upcoming dividend). You are now fine unless XYZ drops to $49.70 a share.
OK case: you get assigned, so your profit per share is 30 cents, for a return of 0.5% (hey, not bad for 5 days).
Best case: collect dividend of 1 and premium of 50 cents when you're assigned close to expiration. 2.167% return.
I'm thinking that you have a decent chance of getting your dividend since counterparties typically exercise ITM options close to expiry because they don't want to give up the time premium they've paid.
Plus, there's preferential tax treatment for dividends..
Assuming your calls are deep enough ITM, your long position is hedged down to the option's strike price minus your call premium. OK case - you get assigned prior to the ex-date and eke out a small profit (call premium). Best case - you collect the dividend, and you get assigned near expiration. You make a larger profit because you get your premium and the dividend. Worst case: underlying goes BSC on you.. but hey.. no risk, no reward
Example: XYZ is trading at $60 a share and going ex 5 days from now with a dividend of $1.
You purchase XYZ and write calls expiring next month with a 50 strike at $10.30 each (premium is crap, because there's an upcoming dividend). You are now fine unless XYZ drops to $49.70 a share.
OK case: you get assigned, so your profit per share is 30 cents, for a return of 0.5% (hey, not bad for 5 days).
Best case: collect dividend of 1 and premium of 50 cents when you're assigned close to expiration. 2.167% return.
I'm thinking that you have a decent chance of getting your dividend since counterparties typically exercise ITM options close to expiry because they don't want to give up the time premium they've paid.
Plus, there's preferential tax treatment for dividends..