Options on dividend stocks

It's easier to pinpoint how dividends affect early exercise. Cash dividends affect option prices through their effect on the underlying stock price.
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A Covered Put Dividend-Capture Strategy

But as a general rule of thumb, if the extrinsic value of an option is lower than the dividend, the party on the other side of the trade will be motivated to exercise their option early to capture it. So, yes, the owner is most likely going to be choosing early assignment. It is not a guarantee, but it is likely. If you place your call options too far OTM, you will lower the risk of early assignment.

Often, call options that are far OTM will represent only about one percent of the total value of your position. If you are trading more short-term e. Choosing call options that are slightly OTM or right around ATM will provide a quality combination of hedge value while mitigating options assignment risk. If the stock goes up, then you risk early assignment. However, when the premium of the option you selected is at least comparable to the upcoming dividend payment, then you will collect that option premium if you are closed out early.

Accordingly, it could be a bit of a wash in terms of the profit of the trade structure.

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It also increases your change of capturing the dividend. It will not, of course, protect against a major market move against you. Overall, covered calls are best in a flat or a weakly rising or weakly falling market. If markets rise a lot, then your upside is capped by the trade structure, so you miss out on those gains. Also, be aware that the spreads on options can often be wide. Options are a useful and versatile tool, but wide spreads can often make their use prohibitive.

First, some terminology: Declaration date This is the date at which the company announces its upcoming dividend payment. Ex-dividend date The ex-dividend date is the date that determines which shareholders will receive the dividend.

What Is a Put Option

The ex-dividend date is often called the ex-date. Record date The record date is the date at which a company will look at its list of shareholders and determine who will get the dividend. The record date is often set two days after the ex-dividend date. Secondly, you need to specify when the stock will go ex dividend. It is the ex dividend date, not the dividend payment date.

When a stock goes ex dividend, its price typically decreases roughly by the amount of the dividend, not assuming other market moves. Conversely, lower underlying price is good for put option holders. If you have selected Ex Dividend Date format, enter the date and optionally time when the stock will go ex dividend in the yellow cells below C32, C If you have selected Number of Days , enter the number of days from now the moment of valuation, usually today to the moment the stock goes ex dividend.

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You can enter fractions of days too. If you have selected Percent of Year , enter the time between valuation and ex dividend as percent of year number of days divided by Most users will prefer to use the same format for time to expiration and time to ex dividend — for instance, enter both as number of days or both as dates and times. You can choose to enter time to expiration and time to ex dividend in different formats. To do so, select the time to expiration format first the dropdown box in C18 and then select the time to ex dividend format C Clicking Yes will set both time to expiration and ex dividend as dates; clicking No will keep the existing formats.

For call options of the same expiration, their values decrease as the strike price increases, since a call gives the holder the right to buy the shares at ever higher prices than the current market price.


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Determining the appropriate covered call to write is thus a trade-off between the expiration and strike price. Since we are writing calls, the bid price must be considered as that is where market participants are willing to buy from you. To understand the potential return boost from selling these options, we can compute the annualized implicit yield using the following formula:. Each call option contract represents shares of the underlying stock.

Your total return is, therefore:. Now, what if the ex-date for VZ shareholders is on August 20th th? However, call options already tend to be priced lower than put-call parity would suggest because of the anticipated dividend in advance - making any excess profits from the strategy minimal if at all existent. Opinion seems to be divided on the wisdom of writing calls on stocks with high dividend yields. Some option veterans endorse call writing on dividend stocks based on the view that it makes sense to generate the maximum possible yield from a portfolio at all times.

Others contend that the risk of the stock being " called away " is not worth the measly premiums that may be available from writing calls on a stock with a high dividend yield.

Increase Your Yields Using Put Options -

Note that blue-chip stocks that pay relatively high dividends are generally clustered in defensive sectors like telecoms, financials, and utilities. High dividends typically dampen stock price volatility, which in turn leads to lower option premiums. In addition, since a stock generally declines by the dividend amount when it goes ex-dividend , this has the effect of lowering call premiums and increasing put premiums.

The lower premium received from writing calls on high-dividend stocks is offset by the fact that there is a reduced risk of them being called away because they are less volatile. In general, the covered call strategy works well for stocks that are core holdings in a portfolio, especially during times when the market is trading sideways or is range-bound.

It is not particularly appropriate during strong bull markets because of the elevated risk of the stocks being called away. Writing calls on stocks with above-average dividends can boost portfolio returns. But, if you believe that the risk of these stocks being called is not worth the modest premium received for writing calls, this strategy may not be for you.

Moreover, efficient markets will already price in the dividend in the call option's premium in advance, taking away some of this strategy's attractiveness. Advanced Options Trading Concepts.


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