My 2018 primer, Selling Options...Simply Called and Simply Put, targets 3 groups: investors that are new to option trading, Series 7 exam students, and stockbrokers who passed Series 7 but lack good understanding of option trading (for 8 years, I was one of them). But this blog is helpful to investors and stockbrokers with all levels of option trading experience. My posts offer a pithy, first person style that I have used since 1995 to lessen their option trading angst.
Thursday, September 19, 2019
covered call, in the money, ex-dividend?
I often sell monthly covered calls against DIA, the ETF that holds the 30 Dow stocks. DIA pays a monthly dividend. Its current yield is around 2%. The ex-dividend date is always option expiration Friday, which is tomorrow, September 20, 2019. My current DIA September 20, 2019, covered call has a strike price of $267. Today, DIA's at $271.42, & my call's $4.42 in the money. With dividend paying equities like DIA, in the money calls are often assigned against the call seller on the day prior to ex-dividend date, which is today, September 19. If this happens, I'll be assigned to sell my DIA today, at $267, & because ex-dividend is not until tomorrow, I'll lose my monthly dividend. As part of my monthly routine when my covered call is in the money, today (one day before ex-dividend date) I considered a one month repair strategy to avoid the premature assignment of my covered call & loss of my dividend: buying back the September $267 call at the $4.60 ASK & selling the October 18, 2019, $269 call at the $4.90 BID, pocketing the 30 cent credit. In my evaluation of this repair strategy, I calculate my potential annualized return. I don't know which way DIA will move over the next 29 days, so I presume that DIA stays at $271.42 for this calculation. If DIA stays flat, I'll be assigned to sell at $269 on October 18. $2 strike price appreciation + $0.30 premium credit = $2.30 return. $2.30/$267 = 0.86% which annualizes to 10.8%. Add DIA's CY of 2% = 12.8% potential for the repair strategy. My new October $269 call would still be in the money with today's repair, and premature call assignments generally do occur on the day before ex-dividend which is today, but it's reasonable to dismiss this concern until the next ex-div date which is October 18. (It is unlikely to see my new October $269 call assigned today because then I'd receive the extra $2.30 repair return almost instantly!) In comparison to the repair strategy, I considered allowing my September $267 call to be assigned today, obliging me to sell my DIA at $267. If so, tomorrow I'd sell a DIA, October 18, 2019, cash secured put. At today's pricing, I'd sell the $271 put, at a $3.60 BID. $3.60/$271 (the cash secured put's reserve requirement) = 1.33% which annualizes to 16.7%. Today, because I presume a flat market - I must do so since I don't know it's direction - I chose the put strategy at 16.7% over the covered call repair strategy at 12.8%.
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