When a dividend paying stock also has options, one way to cash in on both the dividend and the option premium is to write an ITM covered call right before the ex-dividend day.
Take WHX. WHX’s Sept. 13 calls for 2.5 strike was 2.65 and for 5 strike was o.2. If one writes a covered call for strike 2.5 before the ex-dividend day (Aug. 15th), buy 10000 shares WHX at 5.11, sell 100 contracts of Sept. 13 call at strike 2.5 for 2.65. Net debit: $2.46 x 10,000 (1 contract = 100 shares) = $24600. Dividend payment is $0.53/share x 10000 = $5300. By Sept. 13, if WHX price is above $2.5, the shares are called away (at $2.5/share), the net result is: $25000 – $24600 + $5300 = $5700. 5700/24600 = 23%. The margin requirement is about 30%, so the net return is 23% x 3 = 70% in one month.
The call strike should be greater than the sum of (the current stock price – dividend). The Stock price may drop by the amount of the dividend on the ex-dividend day, but if the stock price is still above the call strike, one can allow the stock shares to be called away while keeping the option premium and the dividend.
Note: one thing to watch with this strategy, however, is the call away of stocks before ex-dividend date. Most of the high dividend stocks don’t have much option time value. Only stocks with high dividend and high option time value are good candidates for this strategy.
Dividend Calendar: http://www.thestreet.com/dividends/index.html
