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One strategy for capturing dividends is to buy the stock/ETF and then sell calls against that security as a hedge—a covered call.  The value of the short calls moves in the opposite direction of the stock/ETF, providing a hedge.   There are three major variables with this strategy:

• If you sell deep in the money (ITM) options you may feel you’ve found the golden goose.  The calls provide a great hedge, virtually eliminating risk from your position.   Unfortunately, your calls will almost certainly be assigned the evening before the ex-dividend day.  The owners of the calls are not about to let you get away with collecting dividends with such low risk, so they exercise the option you sold them.  They call away your stock and they collect the dividend.  Your position is closed out—no dividend for you.  The only profit you might have is from any premium present when you created the position (if your net investment was less than the strike price).   Some people use this strategy hoping that their options will not be assigned, and not all are, but in my experience the percentage not assigned is very low.

Too hot  (too much risk)    Calls without enough hedge value,  calls that don’t expire for a long time

• What I have found to be a good combination is:
  • Find stocks/ETFs where the options will expire within 10 business days of the ex-dividend date
  • Create the covered call position about a week before the ex-dividend date
  • Choose a strike price that gives you a premium about equal to the dividend value.
• This recipe will usually result in a covered call position that will be assigned on the evening before the ex-dividend date.  You typically don’t collect the dividend, but since the option is closed out you keep the option premium which is roughly equal to the dividend amount.
• The calls will provide a decent hedge against risk.  Not enough to protect against a major market move, but they do provide significant protection
• If the stock/ETF value goes down after you put the covered call in place then the chances of call assignment decrease—bettering your chances of collecting the dividend.  If you do collect the dividend  the breakeven point on your position is improved, and your maximum profit potential goes up by the dividend amount.
• If the bid / ask spreads on the stocks / options are significant you will probably need to use a combo order to get a decent profit potential.
• While ok in flat or rising market — this position will not hedge a serious bear move — be prepared to bail out if the market goes seriously south

Related posts

• Dividend Capture Strategies
• Capturing dividends with covered calls–are you ready?
• Understanding covered calls–an analogy