The main reason for early exercise of our covered call writing options relates to corporate dividends. The key date to be aware of is the ex-dividend date. This article will clarify and define the dates related to corporate dividends and also discuss an anomaly related to special dividends.
Early exercise of our covered call options
Before definitions are presented, here is the main takeaway of this article:
Shareholders are owed the dividend if they are determined to be shareholders on the record date. An investor would need to own shares on the date prior to the ex-date in order to be (or become) a shareholder of record on the record date (usually the following day). Since the exercise of a call option results in the purchase of shares on the exercise date, it is not uncommon to witness in-the-money call options being exercised on the day prior to the ex-date.
Dividend date definitions
1. Declaration Date
The declaration date is the day that the company declares that it will pay a dividend. With this declaration, the company announces how much it will pay, the ex-dividend date, and the payment date. The declaration date is sometimes called the “announcement date” and most reliable dividend-paying companies keep to a regular declaration schedule.
2. Ex-dividend Date
As of the ex-dividend date, buyers of this stock will no longer be entitled to receive the declared dividend and the stock is said to thereafter trade “ex-dividend” (without dividend). In other words, shares must be owned prior to the ex-date. Before trading opens on the ex-dividend date, the exchange marks down the share price by the amount of the declared dividend.
As an example, BCI, Inc. declares a $0.50 dividend with an ex-dividend date of November 10th. Anybody who buys the shares on the 7th, 8th, or 9th—or any date prior to the 10th—will receive that dividend. When the stock opens on the 10th, it will be adjusted down by $0.50 from the 9th’s closing price. Anybody who buys on the 10th or thereafter will not be entitled to receive that dividend.
As long as a stock is purchased prior to the ex-dividend date, we can then sell the stock any time on or after the ex-dividend date and still receive the dividend. A common misconception is that investors need to hold the stock through the record date or pay date.
Ex-dividend dates are, therefore, the most important date to consider whenever buying a dividend-paying stock.
3. Record Date
The record date is simply the date where the company looks at its ledger and determines to whom they send the dividend checks (“the holders of record”). The record date is always the next business day after the ex-dividend date. This date is unimportant for dividend investors, since eligibility is determined solely by the ex-dividend date.
4. Payment Date
The payment date (or “pay date”) is the date on which a company actually pays out its dividend. Generally speaking, this date falls about two weeks to one month after the ex-dividend date.
Location of ex-dividend date data in our Premium Stock Reports
BCI Premium Report Ex-Dividend Date Location
Why do special 1-Time dividends sometimes have ex-dividend dates after the pay date?
What are special dividends?
Special dividends are extraordinary one-time dividends paid by a firm, often following quarters where profits are exceptionally high, or where a firm sells a division or otherwise raises a substantial amount of unneeded cash. Special dividends are a way of returning cash to investors directly, often in place of a share buyback.
Why reverse pay date and ex-date?
Firms sometimes do this so that the stock’s price is not unfairly compromised. In particular, if the special dividend is a large fraction of the overall share price, then if a stock is sold to a buyer after the ex-dividend date, but before the pay date, then the seller is entitled to the dividend, but has not received it. This means the seller is in the position of having to collect the dividend from the buyer in the future. For large special dividends, these issues can be avoided by having the payment occur before the ex-dividend date.
Significance to dividend capture investors
Having the payment date ahead of the ex-dividend date does not fundamentally change the economics of the dividend. The stock price is still adjusted on the payment date, and that means shareholders may be able to benefit from buying the stock ahead of the dividend, if the stock’s price does not fall by the same amount as the dividend. Investors need to be sure that they do not sell the stock until after the ex-dividend date. If they do, they might have to pay the dividend to the buyer of the security. The lesson for investors here is to pay careful attention to dates when trying to capture special one-time dividend payments.
Discussion
For covered call writing, dividends play a secondary role. There is nothing wrong with trying to capture a dividend along with our option premiums and potential share appreciation when using out-of-the-money call options. However, it should not be the main focus of our trades. I consider dividends “icing on the cake”
The bottom line of this article is that the main reason for early exercise of our covered call options is ex-dividend dates. This is a rare occurrence but when it does materialize, it will be on the day prior to the ex-date. This becomes a factor when we trade in non-sheltered accounts and the shares are of a low cost-basis as exercise may result in negative capital gains tax issues.
Covered call writing streamlined approach: New book & spreadsheets
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Alan,
Upcoming events
To request a private webinar for your investment club, hosted by Alan & Barry: [email protected]
1.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.
Registration link to follow.
2.NYC & Long Island Stock Traders Investment Groups
Thursday March 16th, 2023
7:30 – 9 PM ET
Topic related to multiple applications of selling cash-secured puts.
Specific time, date, topic & description and registration link to follow.
3. Money, Markets, & Monetary Policy Virtual Expo
April 11th – 13th, 2023.
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4. Wealth365 Summit
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5. Your Mid-Year Portfolio Review Virtual Expo
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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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Alan,
I want to invest using the premium blue-chip report and have picked the stocks from the list provided
a. Is it recommended to buy the identified DJ30 stocks on the upcoming Monday and sell the covered calls on Monday or buy Friday and sell covered calls on Friday?
b. For the 1 month and 3 month return calculation assuming you are using the options day + as the start day for calculation (example for one month return it’d have been from Jan 20th 2023 – Feb 17 2023 closing price ) am I right on this.
c. Do you give any weightage for 3 month performance over 1 month, say if I have 6 stocks in the list and want to pick 5 stocks to write covered calls, would you pick one that has better 1 month performance or 3 month performance, if all other things are equal (IV, diff industry etc)
Thanks again
Regards
Raam
Raam,
My responses:
a. Monday: We will lose little or no time-value benefit and avoid weekend risk.
b. The information provided in our premium member reports is based on the data as of market close on the date the report is published to our member site including the date of the report. So, 1-month and 3-months prior to and including the date of publication.
c. Since we are using weekly or monthly options (for the most part), 1-month price performance is weighted more heavily in our trading decisions and our reports are sorted by 1-month returns. However, it is important to note that all eligible Dow 30 stocks in our Blue Chip Reports have outperformed the S&P 500 in both 1- and 3-month time frames.
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 02/17/23.
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:
https://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.
A note…the Weekly Report for 02/24/23 will be published a day earlier on 02/23/23 using the closing prices for Thursday, 02/23/24.
Best,
Barry and The Blue Collar Investor Team
[email protected]
Alan,
I attended one of your recent webinars where you talked about ultra low risk strategies using delta and implied volatility. Both seem really good but I am wondering if you have a preference of one over the other?
Thank you.
Peter
Peter,
I did a comparative analysis of the 2 approaches using dozens of underlying securities, both ETFs and individual stocks. The resulting strikes were either the same or 1 strike off. Both work for purposes of crafting trades with a high probability of success.
My personal preference is IV which will give us an approximate trading range for the expiration cycle in question based on current option pricing in the marketplace.
Alan
Live webinar for premium members:
Introducing the BCI Streamlined Approach to Covered Call Writing.
Monday March 13, 2023, at 8 PM ET to 9:30 PM ET.
A Zoom invitation & link will be sent to all premium members prior to the event.
There will be an explanation of the process, an introduction to the new book (PDF) and 2 new spreadsheets.
Early order discount coupons will be offered for “Basic”, “Enhanced” and “Total” Packages.
We will introduce this strategy approach to the entire BCI community at a later date.
Alan & the BCI team
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
Alan,
I bought the PMCC calculator. I plugged in the data for QQQ and it said NO, not accepting the input. This happened when the price of QQQ, $301 was entered.
How do you solve this issue?
Thanks,
Felipe
Felipe,
The 1st tab of the PMCC Calculator is designed to assist us in knowing if the trade structure, as entered, meets our initial trade structuring required formula:
[(Difference between the 2 strikes) + (initial time-value premium for the short call)] > cost of the LEAPS option
If it doesn’t meet this threshold, the spreadsheet will show a red, bold “NO” and we must adjust the trade before executing it.
The most common way to “fix” this and get a red, bold “YES”, is to use deeper in-the-money LEAPS strikes which will have a lower time-value component to the premium (and cost more due to the higher intrinsic-value component).
Try this with several deeper ITM strikes and there will be more clarity regarding how to manage this scenario.
Alan
Hi Alan,
Thanks for your answer.
Would it be possible for you to send me a sample of inputs for QQQ? This would be of great help to learn faster the use of the calculator.
I’ve read your books that are excellent. I had great interest what you say about in the money covered calls.
Also your website and what it offers is amazing!
Best regards,
Felipe
Felipe,
Below is a screenshot of the PMCC. It shows a trade with a “YES” This is not necessarily a recommendation but rather an example of an acceptable trade based on our required formula.
I also suggest you master this strategy before entering any trades. If you need guidance where to find appropriate resources, let me know.
Click on the image to enlarge and use the back arrow to return to the blog.
Alan
Hi Alan,
Now the calculator works beautifully! Thanks.
I would like to know the exact formula that gives a YES when calculating. This would be of great help to master the strategy before entering any trades.
Also I would like to read about the Poot man’s covered calls so as to be able to better master the subject. I haven’t found much on it. Just a book where the author , Terry F. Allen, suggests using slightly in the money leaps.
Felipe
Felipe,
Here’s the formula inherent in the spreadsheet:
[(Difference between the 2 strikes) + (initial short call premium)] > Cost of LEAPS
For BCI PMCC information:
Best book:
https://thebluecollarinvestor.com/minimembership/covered-call-writing-alernative-strategies/
Best online video course with downloadable workbook:
https://thebluecollarinvestor.com/minimembership/video-poor-man-covered-call-program/
PMCC Bundle with 2 other video courses:
https://thebluecollarinvestor.com/minimembership/video-covered-call-writing-alternative-strategy-bundle/
Alan
Alan,
Enjoyed your article on “Review of Dividend Dates & Their Impact on Our Covered Call Trades.”
You might also indicate that any options (ITM) with an extrinsic value greater than the expected dividend are highly likely to be exercised.
Barry
Barry,
The most likely scenario for early exercise is when the strike is ITM, the time-value component of the premium is less than the dividend about to be distributed and the ex-date is close to the contract expiration date.
That said, it almost never makes financial sense for early exercise as the option holder can sell the option to capture time (extrinsic) value, buy the stock prior to the ex-date and then capture both time-value + dividend premium. Early exercise is usually the result of retail investor error.
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 02/23/23.
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:
https://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]