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Dividend Boost – How to Profit

Selling covered calls on ex-dividend date stocks is an options trading strategy that involves owning shares of a stock and selling call options against those shares on or around the stock's ex-dividend date. The Dividend Boost is combining the dividend with the call premium with returns of 2-3% in 14 days. Let’s break it down step by step:

Key Concepts

1. Covered Call: This is when you own at least 100 shares of a stock (per options contract) and sell a call option on those shares. The buyer of the call option has the right to purchase your shares at a specified strike price before the option expires. In return, you receive a premium for selling the option.
2. Ex-Dividend Date: This is the date on which a stock begins trading without the value of its next dividend payment. If you own the stock before this date, you’re entitled to the dividend; if you buy it on or after, you’re not. Typically, the stock price drops by approximately the dividend amount on the ex-dividend date, all else being equal.

The Strategy

• Setup: You own shares of a dividend-paying stock. On or just before the ex-dividend date, you sell a call option against those shares.
• Goal: The strategy aims to generate additional income from the option premium while still collecting the dividend, assuming the stock isn’t called away before the ex-dividend date.
• Timing: Selling the call close to the ex-dividend date can capitalize on higher option premiums, as the dividend often increases the value of the call option (especially for in-the-money calls) due to the expected price drop.

How It Works

1. Before the Ex-Dividend Date: You sell a call option. The premium you receive is influenced by factors like the stock’s price, volatility, time to expiration, and the upcoming dividend.
2. On the Ex-Dividend Date: The stock price typically drops by the dividend amount. If your call is out-of-the-money (strike price above the stock price), the buyer may not exercise it, and you keep both the premium and the dividend. If it’s in-the-money (strike price below the stock price), the option might be exercised early, especially if the dividend is smaller than the remaining extrinsic value of the option.
3. Outcome:
   • Stock Not Called Away: You keep the shares, collect the dividend, and pocket the premium. The option may expire worthless if it remains out-of-the-money.
   • Stock Called Away: The executed correctly, The buyer exercises the option, and you sell your shares at the strike price, plus you keep the premium and (if timed right) the dividend.

Risks and Considerations

• Early Assignment: If the dividend is significant and the call is in-the-money, the option buyer might exercise it early to capture the dividend, forcing you to sell your shares before you intended.
• Stock Price Drop: The stock price drop on the ex-dividend date could leave your option out-of-the-money, but this is less of a concern if you’re planning to hold the stock long-term.
• Limited Upside: If the stock surges past the strike price, your profit is capped at the strike price plus the premium, minus your cost basis.

Example

• You own 100 shares of Stock XYZ at $50/share.
• Dividend: $1/share, ex-dividend date is tomorrow.
• You sell a call option with a $52 strike price expiring in a week for a $1 premium.
• Scenario 1: Stock drops to $49 on the ex-dividend date, stays below $52. You keep the $1 dividend, the $1 premium, and your shares (total income: $2).
• Scenario 2: Stock rises to $55, gets called away. You sell at $52, keep the $1 premium and $1 dividend, netting $4/share above your $50 basis ($200 total profit on 100 shares).

Why Do It?

This strategy works best for income-focused investors who want to boost returns on stocks they already own. The ex-dividend date adds a twist because the dividend can inflate the option premium, especially for near-term expirations, giving you a bit more cash upfront.

It’s a balancing act—higher premiums come with the risk of early assignment, so you’d pick stocks and strike prices based on your outlook and goals. If you’re bullish, you might choose a higher strike; if you’re neutral and just want income, a closer-to-the-money strike could maximize the premium.

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