How to Capture Dividends with Call Options

How to use the dividend capture strategy with call options

Oct 25, 2015 at 11:00 AM
    facebook twitter linkedin


    Have you ever noticed a stock getting swarmed with heavy call selling activity just ahead of its ex-dividend date? If so, it's possible that you're witnessing the execution of a dividend capture strategy. This options tactic is an arbitrage play, as it's meant to capitalize on minor pricing blips that occur as the result of stocks going ex-dividend.

    To play the dividend capture, you'll buy shares of a stock just ahead of the ex-div date, and simultaneously write covered calls against those shares. The call options should be in the money by a healthy amount to ensure they move in close concert with the underlying shares.

    For example, let's say XYZ is trading at $15, and it's about to go ex-dividend for $1.00 per share. To take advantage, you could buy 100 shares of XYZ and write a 10-strike call. Assuming this option is worth $5.25, you'll rake in $525 for the sale of the option, while shelling out $1,500 for the purchase of the stock. The net outlay to enter the position is $975.

    The next day, when the stock goes ex-dividend, you'll collect $100 in dividend payments. The stock price will have dropped by $1 per share as result of the payout, which means you can sell your stake at $14 per share -- or $1,400 total. The sold call can then be bought to close for $4.25, or $425 (again, accounting for the 1-point drop in the share price). Netting it all out, you've collected $1,500 and paid $425 for a total of $1,075.

    After subtracting your cost of $975 to enter the position, your total gain is $100 -- the exact amount of the dividend payout. That's why this strategy is called the "dividend capture."

    Bear in mind that the $100 profit doesn't account for brokerage fees or transaction costs, and there are at least four transactions involved. That's why the dividend capture is best-suited for institutional investors and other deep-pocketed players who can afford to trade shares and contracts in bulk.

    Plus, the above example took place in what's essentially a lab environment, where we assumed the dividend payout was the only factor moving the stock and option prices. A major broad-market swing, overnight news for the stock, a huge shift in implied volatility, delays in filling the buy and sell orders, or even the risk of early assignment can all play havoc with a dividend capture.

    As a result, many retail-level traders opt against arbitrage strategies like the dividend capture. Regardless, it's worth knowing what this trade looks like and how it's played. Not only do dividend payments have a notable impact on stock and option prices, but -- as we've just discussed -- ex-div dates can also exert a remarkable influence on option activity.

     

    If you are not making money with options, you aren’t buying options like this…

    There is no options strategy that more perfectly approaches trading the fastest moving and most volatile stocks available in the marketplace than this one. In fact, there is no strategy that better utilizes put options for optimal returns and a real trading edge over other traders in the exact same market. New options traders fail out at an incredible rate without proper trade research, execution timing, and option picking. Capitalize on Schaeffer’s 100+ years of options trading excellence with the most coveted product launch in company history. Don't waste another second... join us right now before the next round of trades are released!

    Schaeffer's Investment Research Master Portfolio Trial
     


     


     
    Special Offers from Schaeffer's Trading Partners