24 April, 2023 seen 29Covered call writing is a popular investment strategy used by many investors to generate income on their existing stock…
On April 28, 2020, I bought an additional 110 shares of ET, paying $7.345 per share. ET is going ex-div on May 6th and promises a hefty $0.305 quarterly dividend paid later in May.
I call this a dividend capture strategy - buying the stock shortly before ex-div date, writing a covered call in hopes to capture the dividend.
Here is my trade setup:
- SLD 1 ET MAY 08 '20 7.5 Call Option 0.20 USD
For this trade, I got a small premium of 20 USD (before commissions) or a 2.7% potential income return in 10 days.
What happens next?
There are a couple of scenarios of what could happen.
On expiry day (May 8, 2020) ET is trading above $7.5 per share - 100 shares of ET get called away, there is small value gain of 0.16 (7.5-7.34) + dividend (0.305$) + premium (.020$). Total gain 0.66 or $66. 8.8% potential income in just 10 days.
But there is a slim chance this is going to happen this way because the options expiry date is the next trading day after ex-div date, and more realistic scenario is with ET stock either trading above $7.5 strike or below
If ET trades above $7.5 before ex-div date - my shares will get called away with 99% chance and I won't get a dividend (been there seen that), but I will realize a value gain + income from premium. 0.16+0.2=0.36 or 4.9% potential income in 10 days
If ET trades below $7.5 before ex-div - I will capture dividend + I have already got premium. 0.3+0.2-0.5 or 6.8% potential income in 10 days.
My break-even price for this trade is 7.34 - 0.5 or $6.84
ET Covered calls table
In total, I have 200 shares of ET now using writing for covered calls.
If my shares will get called away, I will write cash-secured puts to get them back.
Total options income from ET: $87 in 22 days / 6.77%