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American Capital Agency Corp. Message Board

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  • sbrown101750 sbrown101750 Dec 10, 2010 6:44 AM Flag

    Covered Call Question

    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.

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