SPY goes ex-dividend a week from Friday, the 16th with a dividend that I estimate will be around $0.71 per share. Historically volatility around the holidays tends to drop as traders go on vacation so I think it’s unlikely that SPY will drop dramatically in the next 10 days.
I put a dividend capture play in effect by creating a covered call position: selling S121 17-Dec-11 calls at 5.90 and buying SPY at 126.24. To limit my losses if the market totally tanks I put a conditional order in place to buy S117 puts if their asked price increases to 0.60 (they were at 0.40 at the time).
If SPY doesn’t drop below 123 by the 15th, then my calls will likely be assigned that night. I won’t get the dividend, but I will receive the full premium available in the covered call position (5.90-(126.24-121.00) = 0.66). On the other hand if SPY drops dramatically, I’ll end up with the S117 puts, which will put a limit on my loss, plus I’d receive the SPY dividend.
If SPY ends up right around 121 on the 15th, things will get interesting. The call premium will probably be around the dividend value even though there is only one day left on the options (the IV value typically inflates before the ex-dividend date). If the calls are not assigned, then I receive the dividend, which lowers my break-even point by the dividend amount. The premium of the calls will drop to zero on Friday the 16th — most of that drop will happen after lunch. If it looks like SPY will close above 121 I’ll hold onto the position—which closes itself out automatically if the call is in the money at expiration. Otherwise it’s a trade-off between waiting for the premium on the options to extinguish vs the movements of SPY itself.
For more information on dividend capture, see this post.
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