I like to sell out of the money covered calls on dividend yielding stocks as a means of generating cash with little risk. On a stock like HFC, if a special dividend is declared, it appears that the covered call strike price that I am holding is reduced by the special dividend amount. For example, I was holding an Oct42.5 CC which became Oct42 when a special dividend was declared. This makes the initial sale of the CC less attractive. Can someone shed some light on this subject? I'm moving away from the CC strategy on this stock due to the frequency of the special dividends in favor of holding for now.
The share price of the stock drops by the amount of the special dividend on the ex-divy date. Therefore technically it has a net zero effect on the option.
With that in mind, due to the regularity of the special dividends, the share price usually rebounds to pre-ex-divy date pricing within a few trading days. This is just the strength in the stock, which if holding CC's, would be a negative for you.