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American Capital Agency Corp. Message Board

  • natolx natolx Dec 9, 2010 4:37 PM Flag

    Covered Call Question

    If I sell covered calls for Jan 22nd with a strike price of 30, when the ex-dividend comes around does the release of the dividend have any affect on the strike price?
    Like if its 30 and they release a dividend of 1.40 does the strike price get adjusted to 28.60 automatically?

    I realize this may be a silly question but want to know before I dip into options for the first time.

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    • Last dividend I had covered calls on all of my stock only 12 options got called away. I got 1.50 on the ones that got called away 1.40 on the ones that I got the dividend on. I used the money to buy more shares 3 days after exdividend now I have more shares than I did.This time the company offered more stock before they have said what the dividend is so I don't expect as big a drop.I might sell covered call at 31 or so if I get a good price. What I want out of this stock is 1.40 or better every three months. If the dividend was not this month I would say that the price of this stock would or should I say the options would crash the week that options expire.

    • Be careful who you listen to on these boards. Many are clowns - like the first who responded with an INCORRECT/ANACCURATE ANSWER. Exercise of options on the expiry date is only done when the stock price is at or above the strike. But be careful on dividend paying stocks, because the stock can get called early even if it's not trading above the strike because the certainty of collecting the option raises the value of the stock. In my experience this has only happened on the ex-div date.

      • 1 Reply to gearboxkart
      • Gear,

        You are correct! Even though it doesn't make much sense why the holder on the other side of your OTM call would do so, they can assign you at ANY time .They would be long the shares at a higher cost entry price than the current PPS. You would think they would sell their long call position and simply go long the shares at the current market,go figure.

        Especially if there is much time value in their calls. They would make much more money by selling their calls and buying new shares if they want the dividend.

        Can anyone enlighten me on why they would exercise their calls if they 're OTM with any appreciable time value(theta)? I've never been able to figure that one out.

    • On regular quarterly dividends, the strike prices are not adjusted. However, don't expect that a covered call will protect you very much when the stock goes ex-dividend. The delta of the Jan 30 call is .64 with extrinsic value of $1.42. (Isn't is interesting that the extrinsic value of the option almost equals the expected amount of the dividend?)

      When the stock goes ex-dividend, most of the price change due to the dividend will be absorbed into the extrinsic value of the sold option. The delta of your sold option will increase and you will end up losing most of the dividend in the value of your position anyway.

      You learn quickly that the Market Makers don't allow many free lunches in this business.

    • yes it does i wold sell calls after they announce they divy in a week or two

 
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