I’ve been asked a few questions via email lately regarding the selling of covered calls on stocks with dividends. Is the payout of the dividend affected if you sell a call against a stock you own? What if the stock gets called away? How do you deal with these situations?
The answer is that if you own the underlying stock on the ex-dividend date, you will collect the dividend. If the stock gets called away before the ex-dividend date, you will not get paid the dividend. In addition, option premiums are affected if the ex-dividend date occurs before the option’s expiration date.
The easiest way to make certain you don’t miss out on a dividend when selling a covered call is to write calls against stocks that don’t pay a dividend in the first place! In fact, that’s one of the very reasons to write calls – to create a dividend on a stock that doesn’t actually pay one.
I have four plays in this arena that may be of particular interest. The first two are for investors who have the available capital to buy at least 100 shares of Apple (NASADAQ:AAPL) or Google (NASDAQ:GOOG). In both cases, these are stocks I’d be happy to own. Writing calls can be risky because the path of least resistance on these stocks is higher, and this pair of stocks should continue in that direction for some time to come. Nevertheless, the repeated selling of calls on stocks this expensive can also lead to some very nice returns.
With Apple, you can buy the stock here at a limit price $530, and sell the April-dated 530-strike call for $24. That’s a fantastic absolute return of $2,400. And if Apple drops, I frankly wouldn’t care. The trade is protected down to $506 ($530 minus the $24 credit), and Apple is certainly likely to rise over the long term.
Likewise, with Google, you can buy the stock here at $605, and sell the April 605 Call for $25. That’s a fantastic absolute return of $2,500. Again, even if Google drops, the trade is protected down to $580, and Google’s upside is likely to continue.
DIRECTV (NYSE:DTV) is another go-to stock for me when it comes to options. I will often sell naked puts against the stock to either collect the premium, or have this delicious stock put to me. However, as it doesn’t pay a dividend, you could buy the stock right here at a good price of $46, and sell the April 46 Call for $1.55 – and you can buy a lot more stock and sell a lot more calls than you could with Apple or Google.
Cree, Inc. (NASDAQ:CREE) is another good candidate for this strategy, as are many tech stocks. In this case, you want a stock that has positive free cash flow, has plenty of cash and little debt, and is not in any kind of financial trouble beyond these criteria. Cree fits the bill, and you can buy the stock at $27.50, then sell the April 28 call for $1.90. That’s a very nice premium of 7%, plus another 2% upside from the strike price if it gets called away.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.
