Covered call writing is a low-risk, cash generating option-selling strategy. Premium is generated by undertaking the contractual obligation to sell our shares at a price (strike price) and date (expiration date) that we, the option sellers, determine. Frequently, dividend distributions represent an additional potential source of income. This article will use a real-life example with Deere & Company (NYSE: DE) to demonstrate how to calculate the returns when both option premium and dividend income is realized.
Real-life trade with DE
- 9/26/2022: DE trading at $334.22
- 9/26/2022: STO the 10/21/2022 $340.00 call at $10.25
- 9/29/2022: Ex-dividend date for a dividend distribution of $1.13
Pre- and post-dividend calculations will be shown.
DE dividend information (www.dividendinvestor.com)
DE: Dividend Information
DE option chain on 9/26/2022
DE: Option-Chain Data
DE: Pre-dividend initial calculations using the BCI Trade Management Calculator (TMC)
DE: Initial Calculations Before Dividend Capture
The Trade Management Calculator shows an initial 26-day time value return of 3.07%, 43.05% annualized. There is also an additional income stream of 1.73% if DE moves up to, or beyond the $340.00 strike.
DE: Post-dividend initial calculations using the BCI Trade Management Calculator (TMC)
DE: Initial Trade Calculations with Dividend Income
Note the following:
- The option premium entry was changed from $10.25 to $11.38 to incorporate the $1.13 of captured future dividend income
- The initial time-value return changed from 3.07% to 3.40%
- The annualized initial time-value return changed from 43.05% to 47.80%
- The upside potential was unchanged at 1.73%
When to make the change in the TMC spreadsheet
We must ensure that we will, in fact, capture the dividend. This is why we wait for the ex-date (my preference) or the end of the contract to make the enhancement. If our short calls are not exercised by the ex-date, we know the dividend will be added to our brokerage accounts on the distribution date.
Discussion
Dividend income can be factored into our covered call writing trading results by adding the dividend amount on or after the ex-dividend date. This article did not cover any potential trade adjustments that may change initial trade calculations in either direction.
Premium member live Zoom webinar: A streamlined version of covered call writing
New Book + 2 New Spreadsheets
For premium members:
- Monday March 13, 2023 @ 8 PM ET
- A Zoom invitation & link will be sent to all premium members prior to the event
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Over the years, the BCI community has been incredibly gracious by sending our BCI team email 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:
Dear Alan,
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Upcoming events
To request a private webinar for your investment club, hosted by Alan & Barry: info@thebluecollarinvestor.com
1.A Streamlined Version of Covered Call Writing: Introduction to premium members
Monday March 13, 2023
8 PM ET
A Zoom invitation & link will be sent to premium members prior to the event.
Early order discount coupons offered.
2.Mad Hedge Investor’s Summit
Wednesday March 15th
11 AM ET – 12 PM ET
Portfolio Overwriting: Covered Call Writing Our Buy-And-Hold Stocks
Increasing profits and avoiding tax issues
Our buy-and-hold portfolios in non-sheltered accounts are generating 8% – 10% per year. Can we increase these yields by selling stock options while, at the same time, dramatically decreasing the probability of our shares being sold to avoid potential tax implications? The answer is a resounding “yes”. Portfolio Overwriting is a strategy that can benefit millions of investors seeking to enhance portfolio returns using a low-risk covered call writing-like strategy.
3.NYC & Long Island Stock Traders Investment Groups
Thursday March 16th, 2023
7:30 – 9 PM ET
Selling Cash-Secured Puts: 4 Practical Applications
Topic related to multiple applications of selling cash-secured puts.
Selling cash-secured puts is a low-risk option-selling strategy which generates weekly or monthly cash-flow. This presentation will detail how to craft the strategy to multiple applications which will align with various goals and personal risk-tolerances. Topics included in the webinar include:
- Option basics
- The 3-required skills
- 4-practical applications
- Traditional put-selling
- PCP (Put-Call-Put or wheel) Strategy
- Buy a stock at a discount instead of setting a limit order
- Ultra-low-risk strategies
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.
4. Money, Markets, & Monetary Policy Virtual Expo
April 11th, 2023
2 PM – 4 PM ET
Master Class (paid event to The Money Show)
In depth presentation on selling cash-secured puts
Registration link to follow.
5. Wealth365 Summit
April 17th – 22nd
Covered Call Writing Dividend Stocks to Create a 3-Income Strategy + A Streamlined Approach to Covered Call Writing
Covered call writing is a low-risk option-selling strategy that generates weekly or monthly cash-flow. By mastering the skill of strike price selection and adding dividend distributions, a potential 3-income strategy can be crafted with a goal of beating the market on a consistent basis.
Bonus topic: An introduction to the BCI streamlined approach to covered call writing creating a more user-friendly and time-efficient path to this low-risk option-selling program.
Topics covered in this webinar include:
- Strategy analysis
- Option basics
- What is covered call writing?
- Dividend distribution
- Stock selection
- Option selection
- Trade management
- NEW: A Streamlined Approach to Covered Call Writing
Real-life examples will be highlighted with Dow 30 stocks using option-chains and calculation spreadsheets.
Attendees will have the opportunity to participate in written Q&A during the entire webinar.
Specific time, date and registration link to follow.
6. Your Mid-Year Portfolio Review Virtual Expo
June 27th – 29th, 2023
Specific time, date, topic & description and registration link to follow.
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Alan,
If the option buyer exercises on the ex dividend date, who gets the dividend, us or them.
Thanks,
Beth
Beth,
If early exercise to capture a corporate dividend does not occur prior to the ex-date, we, the covered call writers, capture the dividend, not the option buyers.
Alan
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 03/10/23.
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:
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Best,
Barry and The Blue Collar Investor Team
barry@thebluecollarinvestor.com
Hi Alan,
a question
when price falls below cost basis I saw you have a video on using options to partially recovered- seemed complicated to me
I also saw other covered call writers using other techniques like
1- purchasing more shares to reduce the average cost
or
2-simply writing a call option below the cost basis to get the income
from the covered call and if the stock is assigned below the cost basis
then simply repurchase the shares and rinse and repeat
I suppose this is a good technique especially if one wants to own the
stock regardless and only interested in the covered call income and
perhaps the dividend and perhaps some possible capital gains in the future?
wondered about your thought on #3 – is a technique you have used or do
you think this is a viable way to go?
Thanks,
Reggie
Reggie,
There are several strategies we can implement on declining shares, including rolling-down, waiting to “hit a double”, selling the shares, all starting by buying back the short call. Implementing our 20%/10% guidelines is critical in this area.
I do not like buying more shares to “average down”. In this approach, we are adding more cash to a losing position. As an alternative, we can use our Stock Repair Calculator to lower our breakeven at little or no cost:
https://www.thebluecollarinvestor.com/combing-covered-call-writing-and-the-stock-repair-strategy/
My 8th book, “Exit Strategies for Covered Call Writing and Cash-Secured Puts”, contains 27 chapters related to position management:
https://thebluecollarinvestor.com/minimembership/softcover-exit-strategies-for-covered-call-writing-and-selling-cash-secured-puts/
Alan
Alan,
I ordered your book
what about this question though?
2-simply writing a call option below the cost basis to get the income from the covered call and if the stock is assigned below the cost basis then simply repurchase the shares and rinse and repeat I suppose this is a good technique especially if one wants to own the stock regardless and only interested in the covered call income and perhaps the dividend and perhaps some possible capital gains in the future?
I wondered about your thought on #2 – is a technique you have used or do you think this is a viable way to go?
Reggie
Reggie,
Rolling-down to an out-of-the-money strike, which may be below cost-basis, is a viable mitigating strategy in certain circumstances. I use it frequently.
Now, if that option is exercised, and we want to stay with the same underlying in the next cycle, we can buy it back or avoid exercise altogether by rolling the option out or out-and-up, thereby avoiding the sale of our shares.
One of the many advantages of traditional covered call writing is that we get to re-evaluate our bullish assumptions on our stocks & ETFs on a frequent basis. If our stock no longer meets our system requirements, we simply move on to a new, better-performer. We have no loyalty to our stocks, only to our cash.
I am positive that once you read and master the information in our new exit strategy book, dozens of doors will be open to you which will allow for trade mitigation and enhancement with confidence and improved results.
Alan
Alan,
Very excited to learn the BCI method combining value investing with technical analysis.
I just became aware that the synthetic covered call (Poor Man’s Covered Call) has less risk and greater return than the traditional approach. What are your thoughts on this strategy?
Do you have a strategy that uses covered calls on Weeklys? I understand that you prefer monthly options.
Thanks,
Steven
Steven,
1. All the BCI strategies can apply to Weeklys. Although I do prefer monthly expirations, I do have a few portfolios dedicated to weekly calls and puts. Here’s a link to 1 of many articles I have published using weekly expirations:
https://www.thebluecollarinvestor.com/portfolio-overwriting-with-weekly-options/
2. The PMCC, like all strategies, has its pros & cons. Many investors consider the PMCC “covered call writing, but cheaper” That definition is misleading because the strategy contains several moving parts that make it much more complicated.
Lower risk? Well, we are investing less money per trade compared to traditional covered call writing, but our cash is still at risk. This is why I developed a formula for initial trade structuring which is inherent in the BCI PMCC Calculator.
We must master all the nuances of the PMCC strategy before risking even 1 penny of our hard-earned money and this concept applies to all strategies.
Here are links to BCI products related to the PMCC strategy:
https://thebluecollarinvestor.com/minimembership/video-poor-man-covered-call-program/
https://thebluecollarinvestor.com/minimembership/poor-mans-covered-call-calculator/
https://thebluecollarinvestor.com/minimembership/poor-mans-covered-call-calculator/
Alan
Premium members:
This week’s 4-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.
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Alan and the BCI team
Hello Alan,
Is it an option to start a CEO portfolio with $25,000 if you only get one contract for each of the four ETFs? I am new to covered call investing, so am sure I am missing something, but I wanted to ask the question.
Also, do current premium members get free access to the new 2023 updated Covered Call Writing online video course, or do we pay an additional fee? If current premium members do have access, how and where do we access the new updated information?
Thank you!
Tony
Tony,
For a cash reserve of $25k, we will need to drop down to 2 – 3 of the Select Sector SPDRs, depending on the price per-share. The CEO Portfolio Setup Spreadsheet will assist with portfolio construction.
The updated covered call writing online video program is not part of premium membership, but members are entitled to your member discount.
If you previously purchased this course, you will automatically get the updated, enhanced version when you login at no additional cost.
Alan