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Dividend Capture with Covered Call strategy - anyone do this?
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Dividend Capture with Covered Call strategy - anyone do this?

  #1 (permalink)
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Dividend Capture with Covered Call strategy - anyone do this?

Hi there,

I am thinking about my investment approach for 2012 and truth be told, its going to have to be quite passive. I have a busy year ahead of me and was thinking up some ways to get income, yet reduce risk and time spent. Risk-free (or near enough) would be better.

So I came up with this idea. Its a Dividend Capture method which involves buying a stock (a high dividend payer) and writing a deep in the money call option in order to get the dividend income but reduce downside risk to near zero.

An example:

NYSE:T, last trade is $29.87 (27th Dec)
Jan13 $15 call, last trade is $14.83
  • Buy 1000 shares NYSE:T costs (29870) + fee ($30)
  • Sell 10x Calls Jan13 $15 strike, nets 14830 + fee ($7)
  • Net cost $15077
  • 5x Dividends paid on 6th Jan 2012, March, Jul, Oct and 6th Jan 2013 of ~$0.48/share
  • Total dividends received between now and option expiry = $2400

So basically, if the call options expire in the money the stock is called at $15 and you receive $15/share = $15,000 less any exercising fee. However in that time you received $2400 dividend on a net outlay of ~$15,100. This is a yield of around 15% and it is virtually risk free.

The risks are:
  1. The options are called early, meaning you lose your exposure to the dividend
  2. The stock closes below $15 in Jan 2013 - very unlikely.

Am I missing something? Seems like a no-brainer way to make a steady, low risk return.

Best regards,

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  #3 (permalink)
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andyb1979 View Post
Hi there,

I am thinking about my investment approach for 2012 and truth be told, its going to have to be quite passive. I have a busy year ahead of me and was thinking up some ways to get income, yet reduce risk and time spent. Risk-free (or near enough) would be better.

So I came up with this idea. Its a Dividend Capture method which involves buying a stock (a high dividend payer) and writing a deep in the money call option in order to get the dividend income but reduce downside risk to near zero.

An example:

NYSE:T, last trade is $29.87 (27th Dec)
Jan13 $15 call, last trade is $14.83
  • Buy 1000 shares NYSE:T costs (29870) + fee ($30)
  • Sell 10x Calls Jan13 $15 strike, nets 14830 + fee ($7)
  • Net cost $15077
  • 5x Dividends paid on 6th Jan 2012, March, Jul, Oct and 6th Jan 2013 of ~$0.48/share
  • Total dividends received between now and option expiry = $2400

So basically, if the call options expire in the money the stock is called at $15 and you receive $15/share = $15,000 less any exercising fee. However in that time you received $2400 dividend on a net outlay of ~$15,100. This is a yield of around 15% and it is virtually risk free.

The risks are:
  1. The options are called early, meaning you lose your exposure to the dividend
  2. The stock closes below $15 in Jan 2013 - very unlikely.

Am I missing something? Seems like a no-brainer way to make a steady, low risk return.

Best regards,

I have tried this and it didn't work for me. Because of the bid/ask spread, a market maker will accumulate free long options and call the stock to capture the dividend themselves before ex-div day. And they will call your stock. But if you play the game, make sure you capture option premium because that may be your only prize. Or you might go ITM the 2 months around ex-div and go OTM on ex-div month. Still a dangerous game unless it's with utility stocks. Next month I am going to investigate a collared spread on utility stocks with ATM call options and on the ex-div cycle, I will go OTM.


Last edited by Tiberius; December 27th, 2011 at 11:21 AM.
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  #4 (permalink)
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If it sounds too good to be true...

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True, your stock will be called simply to capture the dividend. Most of those who make money in options are those who sell and collect premiums.

One relatively simple way is to buy a bunch of leaps in a down market and sell pieces every month (time premium decays very fast during the last 30 days) until they are all sold. What you sell either expires worthless or its called from your bank of leaps. You don't need to own the stock. The best time to buy leaps is usually during the Spring to mid-summer when seasonally speaking markets hit the lows of the year.

Of course, selling covered calls (and capturing dividend) is another choice. But instead of buying stocks simply sell puts and collect premium. If the stock is assigned to you then sell covered calls.

The idea is to collect premium without risking too much capital.

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Yes, I'm a subscriber to the "no such thing as a free lunch" school of thought. Having done some reading on this topic, I found out that if the Option is priced under the stock value, as is the case with those AT&T options ($15 strike was selling for $14.83 when stock price was $29.87) then you're asking to get exercised. Ideally you need to purchase options with a time value (ie: strike + premium > stock price) so that they have a lower chance of getting exercised immediately. Similarly options with a delta near 1.0 are going to get exercised. They delta needs to be lower.

This doesn't tend to happen on low volatility stocks like AT&T, nor with deep in the month options. I still reckon its worth giving it a go. With a not so deep in the money option you're downside risk if exercised before the first dividend payout is still minimal.

Be happy to hear more people's experiences on this though!

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  #7 (permalink)
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another way?

Hi Andy,

I think you have already recd some good replies - market makers and early call exercise. When you realize that the opposition has big pockets, can trade without a spread or commission and have teams of people looking for risk-free arbitrage situations - you can see that beating them at their game can be a poor expenditure of time.



I think you are better off:
  • taking some risk
  • expressing a market viewpoint
to achieve a low-risk low-management solution, which is what I understand you are trying to do.



The highest premium for options is generally:
  • about 2 months time
  • out of the money a bit
  • when the stock has moved up recently (for call options)
------------
I think the market is toppy and that high yield big-cap US companies are fully or overpriced (which is why the call of Jan 13 @ $15 is 14.80 -you are getting zero for your time premium ie a low price).



Here is what I would suggest:
  1. make a chart of the 5 high-yielding stock and their average.
  2. when one is looks temporarily high buy a far out-of-the-money 12 month put option (insurance put)
  3. when this stock moves down sell an out of the money at the put option against cash in your account = the put exercise price. (acquisition put)
If the stock moves down to the acquistion put price then you will purchase your stock at a low price (where your cost is below market even at that time due to the acquistion put premium).

Keep your mind in the future, in the now.

Last edited by aquarian1; January 2nd, 2012 at 10:41 PM. Reason: insurance put 12months not 2 months
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The fun is in the numbers
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Andy's millions

Part 2 - an example

{edit: you would use a different put for acquistion (or buy 2 insurance puts) - I changed the acquisition put month be short time to expiry 1month e.g May and resell a new one each month until you are taken out.
One month at the money which is $0.76 now. Where it says $3.25 you would have $0.76 each month until take out -sorry for the mess!}

I have used today's prices. So we start with $26,000. We buy an insurance put at $25 for Jan13 ($1.32).

Let's say the stock falls to $26, by April. We then sell an almost at-the-money $25 April 12 put, which should be about {$0.76 one month at the money} at that time.

The stock falls below $25 and we are exercised on our acquistion put - meaning we must buy the stock at $25. That's OK it is a lower price than if we buy it today. (If the stock continues to fall we have our insurance put to protect us to the downside).

Then the stock rises back up and we close out the trade.

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Keep your mind in the future, in the now.

Last edited by aquarian1; January 3rd, 2012 at 12:04 PM.
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