Friday, September 11, 2009
SPY covered call using Quarterly options -- Dividend capture part II
Bought SPY at 104.45, sold-to-open RDQIW at 3.96 101 strike Expire 30-Sept (net investment 100.49). Should collect ~0.5 dividend also. Did Debit combo order because bid/ask spread on the options was significant.
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4 comments:
It makes sense to use the quarterlies, since the ex date is so close to expiration of the Sept options. What I don't understand is, if the 101 calls you are short are in the money on the 17th or 18th and you are assigned, your stock is called away before the ex-date. How do you earn the dividend or a good part of it?
Hi Gil, Good question. I see inconsistent behavior on the part of option holders with regards to assigning options. Clearly some just forget/aren't aware of the issues, but in some cases I see the pros not assigning when I would expect them to. It might relate to the availability of appropriate futures on the underlying.
A key factor on assignment will be how much premium will be left on this option on this Thursday night (day before ex-dividend). Right now there is about .53 left. If there aren't significant SPY moves / implied volatility changes in the next couple of days the premium will be less than this, but still significant. The IV is about 19.5 now, so if it and everything else stays constant there will be about .28 of premium left on these options on the night of the 17th. If the call holders have a very good dividend capture hedge on the SPY it would be profitable for them to exercise, but if such a thing existed they probably wouldn't be messing around with options...
If SPY runs up considerably the options probably would be called, but then I could console myself with the gains in my long positions and getting .5% return on a 6 day investment.
-- Vance
What you said
The covered call trading is a tactic in which an investor writes (sells) a call option contract while simultaneously owning an equivalent number of shares of the underlying stock. It is most often employed when the investor, while optimistic on the underlying stock, feels that its market value will experience little range over the lifetime of the call contract.
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