Option premiums are influenced by dividends. Today’s video will show you why. I also look at a covered call strategy designed to capture a dividend and why I’m not a huge fan of the idea.
Notes
Dividend capture with covered calls
- I’m not a fan of building a trade just to catch 1 dividend payment.
- Dividend payout is miniscule compared to how much you could lose if the stock drops while you’re in the trade. Your chart read is far more important.
- Stock drops by the amount of the dividend when it trades ex-dividend
- I got paid a 50 cent dividend, but stock opened lower by 50 cents the next day. If it rises back up over the duration of the trade then you’re ahead.
Buy stock at $50, sell ITM $47.50 covered call (1-month).
Stock pays a dividend. I’m still hoping at the end of the month the stock has risen enough to offset the dividend down gap.
Call premium is already reduced by the dividend amount.
If you go too deep ITM, there’s risk of early assignment
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