How to Calculate Dividends into Our Covered Call Writing Calculations – March 13, 2023
Covered call writing is a low-risk, cash generating option-selling strategy. Premium is generated by undertaking the contractual obligation to sell our shares at a price (strike price) and date (expiration date) that we, the option sellers, determine. Frequently, dividend distributions represent an additional potential source of income. This article will use a real-life example with Deere & Company (NYSE: DE) to demonstrate how to calculate the returns when both option premium and dividend income is realized.
Real-life trade with DE
- 9/26/2022: DE trading at $334.22
- 9/26/2022: STO the 10/21/2022 $340.00 call at $10.25
- 9/29/2022: Ex-dividend date for a dividend distribution of $1.13
Pre- and post-dividend calculations will be shown.
DE dividend information (www.dividendinvestor.com)
DE option chain on 9/26/2022
DE: Pre-dividend initial calculations using the BCI Trade Management Calculator (TMC)
Note the following:
- The option premium entry was changed from $10.25 to $11.38 to incorporate the $1.13 of captured future dividend income
- The initial time-value return changed from 3.07% to 3.40%
- The annualized initial time-value return changed from 43.05% to 47.80%
- The upside potential was unchanged at 1.73%
When to make the change in the TMC spreadsheet
We must ensure that we will, in fact, capture the dividend. This is why we wait for the ex-date (my preference) or the end of the contract to make the enhancement. If our short calls are not exercised by the ex-date, we know the dividend will be added to our brokerage accounts on the distribution date.
Discussion
Dividend income can be factored into our covered call writing trading results by adding the dividend amount on or after the ex-dividend date. This article did not cover any potential trade adjustments that may change initial trade calculations in either direction.
Author: Alan Ellman