Dividend capture with deep ITM calls

Discussion in 'Options' started by ChanTrader, Mar 25, 2008.

  1. 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..
  2. For the umpteenth time, there's no "free money" with dividend-related stock-plays nor with option-plays. The market isn't that stupid.
  3. MTE


    I suggest you forget the words "thinking" and "typically" and review why and when do early call exercises happen!

    Here's a hint, an ITM call will be exercised on the day before the stock goes ex-dividend!
  4. Actually there is one that I have found and exploited a couple of times. The setup is rare but it does happen.

    No I will not tell you what it is b/c I don't want this little gem to go away. Luckily the OP is pretty far off track.
  5. ?.............does the "set up" work consistently well or randomly well?
  6. its not worth talking about because there is no dividend that slips by the hundreds and hundreds of market making firms. He cant tell you because it does not exist.
  7. Don't listen to these naysayers. You are indeed the first person in the history of option trading to realize that you can capture a dividend by writing DITM covered calls for about 20 cents below intrinsic and getting assigned early before ex-dividend day.

    Best of luck to you.
  8. LOL
  9. As I recall an ITM CC may disqualify the preferential dividend tax treatment.

  10. Dayam. And I thought that I was the first person to think of this. OK, back to my crayons.
    #10     Mar 26, 2008