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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.

 

Holiday discount

Don’t miss out- ending soon.

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Good for all items in the BCI store and for our Best Discounted Packages

 

Premium Member Benefits Video

This is a great time to join our premium member community with its stock screening and educational (over 200 videos) benefits. We offer more benefits than ever before. For information, click here.

For video explanation, click here.

 

Your generous testimonials

Over the years, the BCI community has been incredibly gracious by sending our BCI teaemail testimonials sharing stories as to what our educational content has meant to their families. Moving forward, we have decided to share some of these testimonials in our blog articles. We will never use a last name unless given permission:

Alan,

After downloading the files and looking through them, I was astounded at the incredible amount of detail you devote to making option sellers successful. Your strategies for rolling both puts and calls are the most comprehensive I’ve ever seen. With your material, I suspect I can raise my APR by at least 5%.

Thank you for the material.

Vinny

 

Upcoming

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 – 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 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 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

Click on join to become a member (Free membership)

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

 

3.NYC & Long Island Stock Traders Investment Groups

Thursday March 16th, 2023

7:30 – 9 PM ET

Details to follow

 

Alan speaking at a Money Show event

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Market tone data is now located on page 1 of our premium member stock reports and page 1 of our mid-week ETF reports.

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About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

2 Responses to “Exercising Call Options to Capture Dividends: A Reasonable Action or Investor Error?”

  1. Barry B December 24, 2022 11:29 pm
    #

    Premium Members,

    This week’s Weekly Stock Screen And Watch List has been uploaded to The Blue Collar Investor Premium Member site and is available for download in the “Reports” section. Look for the report dated 12/23/22.

    We were successful in implementing our system backup and recovery procedures to address our earlier systems issues.

    Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them on The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:

    http://www.youtube.com/user/BlueCollarInvestor

    Reminder: Premium members are grandfathered into your current rate and will never see a rate increase as long as the membership remains active.

    Best,

    Barry and The Blue Collar Investor Team
    [email protected]

  2. Alan Ellman December 28, 2022 5:26 pm
    #

    Premium members:

    This week’s 5-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists Top-performing ETFs with Weekly options, mid-week market tone as well as the implied volatility of all eligible candidates.

    New members check out our ongoing and never-ending training videos (“Ask Alan” and Blue Hour webinars). We add at least one new video each month. Only premium members have access to the entire library of these training tools.

    For your convenience, here is the link to login to the premium site:

    https://www.thebluecollarinvestor.com/member/login.php

    NOT A PREMIUM MEMBER? Check out this link:

    https://www.thebluecollarinvestor.com/membership.shtml

    Alan and the BCI team