It sounds ok in theory however there is a likely problem.
cowvell talks about selling deep in the money calls such that almost the whole premium is intrinsic value with little time value. And we are considering something that pays a high yield (otherwise we wouldn't be so concerned about capturing the dividend). Trouble with this scenario (high yield and little time premium) is that you stand a very good chance of being called away in the day before ex-date. And if that happens the whole strategy was for nothing because you didn't collect your dividend at all. In that case you would have been better selling at the beginning because by selling the calls, you didn't lose money but you kept your funds locked up for the period.
I use options a lot but my approach is simply to collect time premium. For that I sell puts on high yield securities (however not declining trusts like this) and roll the puts forward every quarter, so that I collect a never-ending time premium. I use high yield securities because the yield is baked into the time premiums and so the premiums are good. I roll forward early and so am never at risk of being assigned even if the puts are well ITM (and in the unlikely event I were assigned, it would benefit me anyway since I could easily 'unassign' myself (sell the assigned units and resell the same puts and come out ahead due to having monetized the same time premium twice.
cowbell's deep ITM call idea was interesting to read however in the case of a high yield and low time premium, there is quite high chance of being called the day before ex-date.
I was hoping someone would ask this. Simply buy your position back. Even though this opens up possibilities to personalize the play, remember the objective was to capture dividends. This is designed to be done with minimal account features, while removing loss, giving us gains, and collecting a dividend.
We should have the cash sidelined from the original covered calls, upon exercise we'll have the rest needed to step right back in. Variables are:
- share price is lower - replace shares for less cost (not so bad) might be a good time to average down, use some of the sidelined cash that remained flat as share price fell = more shares with no additional capital (using someone else's money)
- share price is higher requiring more funds - either sell the long calls being used as stock replacement, or exercise them, they are dual function in that they provide capital gains, or offer a way back into our position.
Stocks are adjusted for dividend to prevent people from buying / selling the dividend threshold, so there's no a big threat of being called away the last day, but it doesn't matter anyhow because we would just re-enter. The call buyer with a long expiration date wouldn't likely throw away the remaining time for a zero-sum dividend distribution.
I'm not saying it can't happen but I can think of few scenarios that leave us with no recourse. 9:00 meeting...
" was hoping someone would ask this. Simply buy your position back. "
again, sounds ok in theory but may not work in practice because in this scenario it is very likely that the assignment is done on the day before ex-date (the person on the other end is likely to wait till the last day before he exercises the calls - since he knows he will be able to get the units, he has no incentive to tie his money up earlier than that). Secondly, when you are assigned, the brokerage typically does not notify you until the next day. So if you are called away on the day before ex-date and you only actually find out on ex-date itself you missed the dividend and have no chance to buy back your units to collect it. Something like this actually happened to me, although I don't use calls much.
So it's an interesting theoretical discussion but probably won't accomplish the objectoves.
And if your dealing with thinly traded options as most of these high yield plays probably are, there is the issue of the bid-ask spreads too, which might make the economics of it not work out quite as well (which matters if the whole point in all this is saving yourself money).
I'm thinking on day before the ex-date the "share price is higher requiring more funds - either sell the long calls being used as stock replacement, or exercise them, they are dual function in that they provide capital gains, or offer a way back into our position."
PER and SDR are not declining trusts, yet. SDT is. PER is oily and SDR is gassy. I like your words: yield is baked into the time premium. It gets very scary when SD sell units to raise money every quarter. I screws up the baking. I'm thinking cowbell has a strategy for his units possibly getting called away the day before the ex-date. Do the non-covered, less in the money calls, take care of that?
"PER and SDR are not declining trusts, "
Sorry, all US trusts are declining trusts. It simply means there is a fixed amount of resource in the ground, or in this case wells to be drilled and never any increase to that. So every distribution received brings the total future payout lower. PER and SDR are indeed declining trusts. Just because the drilling isn't yet complete doesn't alter that.