click ↑ 4 Featured

A covered call writing strategy commonly used by hedge funds involves using ITM covered call strikes which expire immediately after an ex-dividend date. This may be appropriate only if share retention is not an integral requirement of the strategy. In this article, a real-life example with American Express Co. (NYSE: AXP) will be used to analyze this approach.

What is an ex-dividend date?

This is the latest date a shareholder must own a stock or ETF to be eligible to receive an upcoming dividend distribution. It is also the most common reason for early exercise of a call option (although quite rare).

Proposed strategy

• Buy shares about going ex-dividend
• Sell ITM covered calls that generate a targeted initial time-value return goal range (15% – 30% annualized is a reasonable goal)
• If the option is exercised early and shares sold (typically, the day prior to the ex-date, but rare), the targeted initial time-value return will be realized
• If there is no early exercise, the dividend will also be captured, increasing the final returns, still resulting in a high probability of exercise after contract expiration (assuming no exit strategy intervention)

Real-life example with AXP

• 12/17/2024: AXP trading at $300.90
• The ex-date for a $0.70 dividend is 1/3/2025
• The 1/3/2025 $295.00 ITM call strike had a bid price of $9.35
• Targeting an annualized return of 15% -30%

AXP dividend information: www.dividendinvestor.com

AXP option-chain on 12/17/2024

AXP calculations without the $0.70 dividend using the BCI Trade Management Calculator (TMC)

• The spreadsheet shows an 18-day trade, if taken through contract expiration (red circle)
• The breakeven price point is $291.55 (yellow cell)
• The 18-day return is 1.17%, 23.71% annualized (brown cells), aligning with our targeted goal
• The downside protection of the time-value profit is 1.96% (purple cell)

AXP calculations with the $0.70 dividend using the BCI Trade Management Calculator (TMC)

• The spreadsheet shows an 18-day trade, if taken through contract expiration (red circle)
• The breakeven price point is $290.85 (yellow cell)
• The 18-day return is increased to 1.41%, 28.53% annualized (brown cells), aligning with our targeted goal
• The downside protection of the time-value profit is still 1.96% (purple cell)

Discussion

Covered call writing can be used around ex-dividend dates by employing ITM strikes, while setting specific targeted returns. Since exercise is more likely than not, the return will either meet our pre-started goal or do even better if the dividend is also captured. It is critical to also keep in mind that if share price drops below the breakeven price money can be lost and, therefore, we must always be prepared with our exit strategy arsenal.

Selling Cash-Secured Puts: Basic and Advanced Principles

Selling Cash-Secured Puts is a 6-part Video Series + downloadable workbook. All aspects of Put-Selling including stock selection, option selection and position management. A huge section on exit strategies and a deeper dive into ultra-low risk approaches to selling cash-secured puts have been added to previous versions of this course. The Companion Workbook contains 111 all-color pages of all charts, graphs and slides. Download Table Of Contents (PDF)

Click here for video & more information.

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 publish several of these testimonials in our blog articles. We will never use a last name unless given permission:

Upcoming events

1. Mad Hedge Fund Traders & Investors Summit

Details and registration link to follow.

2. Long Island Stock Investors Group

Private club

Thursday June 12, 2025

7:30 PM ET – 9:00 PM ET

3. BCI Educational Webinar Series

Using Cryptocurrency in Our Low-Risk Option Portfolios

June 19, 2025

Registration details to follow.

4. Orlando Money Show

Orlando Resort @ ChampionsGate

October 16 – 18, 2025

• Opening ceremony keynote address
• 2-hours Master’s Class
• 45-minute workshop class

Details and registration link to follow.