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Screener Name: Dividend Capture using Covered Calls Strategy: Covered Call


Description:
This screener uses covered calls to capture dividend.Screens for stocks where ex-dividend date is announced and with a dividend amount of at least $0.25.
Screening Conditions
Dividend amount greater than $0.25
ExDividendDate announced.
Option in the money percentage greater than dividend rate.
Option expiry upto 90 days after exdiv date
Details
Before the ex-dividend date, you can do a covered write by buying the dividend paying stock while simultaneously writing an equivalent number of deep in-the-money call options on it. The call strike price plus the premiums received should be equal or greater than the current stock price.
On ex-dividend date, assuming no assignment takes place, you will have qualified for the dividend. While the underlying stock price will have dropped by the dividend amount, the written call options will also register the same drop since deep-in-the-money options have a delta of nearly 1. You can then sell the underlying stock, buy back the short calls at no loss and wait to collect the dividends.
Here, you should ensure that the premiums received when selling the call options take into account all transaction costs that will be involved in case such an assignment do occur.
Example
In September, XYZ company has declared that it is paying cash dividends of $1.50 on 1st October. Before the ex-dividend date, XYZ stock is trading at $40 while a NOV 30 call option is priced at $10.20. An options trader decides to play for dividends by purchasing 100 shares of XYZ stock for $4000 and simultaneously writing a NOV 30 covered call for $1020. On ex-dividend date, the stock price of XYZ drops by $1.50 to $38.50. Similarly, the price of the written NOV 30 call option also dropped by the same amount to $8.70. As he had already qualified for the dividend payout, the options trader decides to exit the position by selling the long stock and buying back the call options. Selling the stock for $3850 results in a $150 loss on the long stock position while buying back the call for $870 resulted in a gain of $150 on the short option position. As you can see, the profit and loss of both position cancels out each other. All the profit attainable from this strategy comes from the dividend payout - which is $150.



  




 
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