So that deep in-the-money call mentioned earlier was possibly trading for less than the intrinsic value. It’s important to remember that dividends are already incorporated into options prices. Options pricing is all computer driven now and any mispricing opportunities are exploited within seconds. Yes, this strategy may have been valid in the past before options became mainstream, but most traders will tell you, this type of arbitrage opportunity disappeared 10 to 20 years ago. If it seems too good to be true, it probably is. Remember there’s no free lunch in this game. Who is on the other side of your trade? Possibly a trader from Goldman Sachs with 10 times more experience trading options than you? Do you really think that a professional trader is going to leave money on the table like that? On ex-dividend date, the stock drops by the dividend amount, but so does the covered call so the two net out and you collect the dividend basically for free.Īll sounds wonderful in theory doesn’t it? Simply buy the stock before the ex-dividend date and sell a deep in-the-money covered call. 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.So you think you’ve found an easy way to capture the dividend on a stock for free using covered calls. Regardless, it's worth knowing what this trade looks like and how it's played. 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.Īs a result, many retail-level traders opt against arbitrage strategies like the dividend capture. 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. 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. That's why this strategy is called the "dividend capture."īear in mind that the $100 profit doesn't account for brokerage fees or transaction costs, and there are at least four transactions involved. Netting it all out, you've collected $1,500 and paid $425 for a total of $1,075.Īfter subtracting your cost of $975 to enter the position, your total gain is $100 - the exact amount of the dividend payout. 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). 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 next day, when the stock goes ex-dividend, you'll collect $100 in dividend payments. The net outlay to enter the position is $975. 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. To take advantage, you could buy 100 shares of XYZ and write a 10-strike call. The call options should be in the money by a healthy amount to ensure they move in close concert with the underlying shares.įor example, let's say XYZ is trading at $15, and it's about to go ex-dividend for $1.00 per share. 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. 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. 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.
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