How to Calculate Dividends into Our Covered Call Writing Calculations

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.

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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.

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12 Responses to “How to Calculate Dividends into Our Covered Call Writing Calculations”

1. Beth March 11, 2023 7:36 am
#

Alan,

If the option buyer exercises on the ex dividend date, who gets the dividend, us or them.

Thanks,
Beth

• Alan Ellman March 12, 2023 7:13 am
#

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

2. Barry B March 11, 2023 10:47 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 03/10/23.

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

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barry@thebluecollarinvestor.com

3. Reggie March 12, 2023 1:40 am
#

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

• Alan Ellman March 12, 2023 7:48 am
#

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

• Reggie March 13, 2023 1:09 am
#

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

• Alan Ellman March 13, 2023 6:39 am
#

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

4. Steven March 12, 2023 9:29 am
#

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

5. Alan Ellman March 15, 2023 5:00 pm
#

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.

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.

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Alan and the BCI team

6. Tony March 16, 2023 12:25 pm
#

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

• Alan Ellman March 17, 2023 7:58 am
#

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