Exercising Call Options to Capture Dividends: A Reasonable Action or Investor Error?

Dividend capture is the main reason for early exercise of our covered call writing trades. More specifically, ex-dividend dates are the times most susceptible to early exercise and having our shares sold at the strike price. This article will analyze the profitability or lack thereof of taking such action.

On July 3, 2022, Graham shared with me a covered call trade he executed with New Residential Investment Corp. (NYSE: NRZ) where early exercise did occur on the ex-date. Was this a positive for the option holder? How about for Graham?

Graham’s NRZ trade

• 6/21/2022: Buy 2500 x NRZ at $9.34
• 6/21/2022: STO 25 x NRZ 7/15/2022 $9.00 calls at $0.60
• 6/30/2022: NRZ ex-dividend date
• 6/30/2022: 25 x $9.00 calls exercised early, and shares sold at the strike price

NRZ: Initial & final returns using the BCI Trade Management Calculator

NRZ: Initial & Final Returns

The spreadsheet shows the following calculations from 6/21/2022 to 6/30/2022 (red arrows):

• The final net option dollar credit is $1500.00 (6.42%)
• The final net stock dollar loss is $850.00 (3.64%)
• The final net combined credit is $650.00 (2.78%)

Option holder’s dividend capture choices prior to the ex-date (on 6/29/2022)

With the stock trading at $9.45 and the $9.00 call option bid price at $0.60 on June 29th, let’s analyze exercise versus selling the option and buying the shares. These are the option buyers’ choices if the goal is to capture the dividend.

Option Holder’s Choices to Capture Upcoming Dividend

Outcomes of early exercise

Option holder: A net credit of $0.70 per-share was generated at the time of exercise, missing out on a net credit of $0.85 if the option was sold and shares purchased prior to the ex-date. The difference is the time-value component of the call premium which was lost due to exercise of the option.

Covered call writer: The trade resulted in a maximum gain with no dividend capture ($0.25 per-share). However, the cash from the sale of the stock was now available to enter a new covered call trade from 6/30/2022 through 7/15/2022. It is reasonable to assume that more than $0.25 per-share can be generated with 15 days remaining until contract expiration. We must also factor in that on the ex-date, the share price will decline by the projected dividend amount.

Discussion

The analysis shows that early exercise was the result of investor error. The call buyer could have generated higher returns and the call seller benefitted from this mistake (assuming the covered call writer was okay selling the shares).

Coming Soon: A new streamlined version of covered call writing

For the past 3 years, I have been investigating ways to consolidate our rules and guidelines for covered call writing into a more user-friendly and time-efficient strategy. I have tested my ideas using real-life trading in my personal portfolios. This past year everything clicked, and I will be sharing this information with you in the 1st quarter 2023… a new game plan which will be especially appealing to those with busy schedules.

This unique blueprint for covered call writing will include a new book detailing every trade I made using this strategy with screenshots from my brokerage account. In addition, it will encompass 2 new spreadsheets dedicated to the new system.

I will share this information, first, with our premium members in the form of a live webinar. At a later date, it will be released to the entire BCI community. Stay tuned.

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Upcoming events

To request a private webinar for your investment club, hosted by Alan & Barry: [email protected]

1.Wealth365 Investors Summit

Week of January 16th – 21st/ Date & time to follow

The Put-Call-Put (PCP or wheel) Strategy 

Using Both Covered Call Writing and Put-Selling to Generate Monthly Cash Flow – Investing with Stock Options

Register free here: https://summit.wealth365.com/alan-ellman

2.Long Island Stock Traders Meetup Group 

Analyzing a 1-Month Covered Call Writing Portfolio from Start to Finish

Thursday February 16,2023

7:30 PM ET- 9 PM ET

A real-life example with a $100k ETF Select Sector SPDR portfolio
Covered call writing is a low-risk option-selling strategy that generates weekly or
monthly cash flow. This presentation will demonstrate how to implement this
strategy using a database of only 11 exchange-traded funds for a 1-month option
contract cycle. These are real-life trades taken directly from one of Dr. Ellman’s
portfolios with screenshots verifying each trade. A final monthly contract result
compared to the performance of the S&P 500 will be calculated.

Topics included in this webinar:

 What are the Select Sector SPDRs?
 How to establish a covered call writing portfolio
 What is the role of diversification?
 What is the role of cash allocation?
 Calculating initial returns
 Analyzing each trade in the monthly contract
 Final results
 Next steps

Go to www.meetup.com/listmg

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Then click on RSVP (meeting is free) to obtain the ZOOM link.

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