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 option chain on 9/26/2022
DE: Pre-dividend initial calculations using the BCI Trade Management Calculator (TMC)
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)
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.
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
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
- Early order package discount coupons will be shared
Premium Member Benefits Video
This is a great time to join our premium member community with its stock screening and educational (over 250 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 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:
Your first book changed my investing life! Now, I want your new book YESTERDAY!!!
To request a private webinar for your investment club, hosted by Alan & Barry: firstname.lastname@example.org
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.