Recently I had deep in the money puts and OTM covered calls on SPY in my IRA account.   As expiration approached I begin to wonder what would happen if I didn’t sell my puts.  If the options were cash settled, like VIX index options, then there would be no question,  the value of the puts at expiration would just be credited to my account.   But since SPY options are physically settled you would normally expect an expiring  ITM put to trigger a short sale of the underlying at the equivalent of the strike price.   Except in an IRA account you can’t sell short.

I spoke with someone at the Fidelity active trader helpdesk, and they said that if you didn’t have the appropriate amount of underlying in your account at assignment, then they would indeed create a short position in your IRA account.   The next step (and I got the feeling there was a pretty short fuse on this) would be to contact you and ask/tell you to close out the short position.   If they aren’t able to contact you , then they would cover the short position by buying the underlying in your account.   Between the time of the assignment and the cover you would be exposed to the market moves of the underlying.    Through this scenario I don’t see how a “free riding” violation could occur, but with long ITM calls I think there is some potential to trigger a violation.

In my situation, my long position in the underlying would cancel out the short sale, so I could let the puts expire, gather the last of the premium on the puts  (my short calls were so far out of the money there was no chance they would be exercised), and comfortably reside in cash over the weekend.

Otherwise, if you aren’t going to be long the underlying at assignment, it looks like a good idea to sell those ITM puts before they expire.

Taken from http://www.option911.com/blog/option-education/how-option-time-premium-decays-over-the-weekend/, click to enlarge

All of this is of course modulated by any changes in the volatility of the underlying, and the market in general.

Some traders avoid options close to expiration because of these factors–and others flock to them.    As a covered call writer I am really attracted to the accelerated time decay of short term options.   I’m not taking any more risk than normal holding the underlying, and I am getting an accelerated decay in the price of the options I am short on.    I will often wait until there is only two or three weeks are remaining on the options to create the position.

Now it can be expiration week, every week for the following Stocks / ETFs (taken from this CBOE posting):

Weeklys on Exchange Traded Funds and equities. As of July 5, 2010, these included the following::

• SPY – Standard & Poor’s Depositary Receipts
• QQQQ – Nasdaq-100 Index Tracking Stock
• IWM – iShares Russell 2000 Index Fund
• GLD – Options on SPDR® Gold Shares
• XLF – Financial Select Sector SPDR
• EEM – iShares MSCI Emerging Markets Index
• C – Citigroup Inc
• BAC – Bank of America Corp
• AAPL – Apple Inc
• BP – BP PLC
• F – Ford
• GOOG – Google Inc.

Fidelity supports trading on these new weekly options, but Schwab does not appear to.   Beware of the listed greeks on these options, the software may not be using the correct time until expiration.

The volume, at least on the SPY weeklies has been substantial (20K today on the 105′s expiring 9-July), so I think the options providers have a winner.

For more information see this options clearing house post.

Schwab ETF  2010  Ex-Dividend and Pay date information

Schwab has now published their ex-dividend / pay dates for all of 2010 for their no-fee ETFs.  The published 2010 dates are:

Ex-Dividend:  23-Dec-09   22-Mar-10 21-Jun-10 20-Sep-10    20-Dec-10

Pay Dates:   30-Dec-09  26-Mar-10   25-Jun-10   24-Sep-10   27-Dec-10

Schwab International Equity ETF™ SCHF
Schwab U.S. Small-Cap ETF™ SCHA
Schwab U.S. Large-Cap Value ETF™ SCHV
Schwab U.S. Large–Cap Growth ETF™ SCHG
Schwab U.S. Large-Cap ETF™ SCHX
Schwab U.S. Broad Market ETF™ SCHB

Schwab  posted their second quarter dividend information here.   Schwab’s distribution / pay dates are very timely — only 4 days after ex-dividend with this most recent dividend.

The  SCHX’s dividend has been similar to SPY’s percentage wise — I think SPY’s September payout will be around .55 — with SCHX currently at 26.  I’m assuming SCHX’s dividend will be around $0.13 per share.

The SCHX has 750 stocks in it, but appears to closely follow the S&P 500.

If you don’t see the ETF symbol you want there are a lot more here: Dividend, Ex-Dividend, and Paydate / Distribution Date information for ETFs ]]> http://sixfigureinvesting.com/2010/06/schwab-publishes-ex-dividend-payout-dates-for-their-no-fee-etf-funds/feed/ 1 http://sixfigureinvesting.com/2010/06/spy-dividend-capture-june-2010/ http://sixfigureinvesting.com/2010/06/spy-dividend-capture-june-2010/#comments Wed, 16 Jun 2010 16:25:24 +0000 http://sixfigureinvesting.com/?p=1361 I bought SPY at 111.64, and sold-to-open SPY 108 June-30 expiration calls at 4.08 for a net investment (debit) of  107.58.     I used the quarterly SPY options because I could go considerably deeper in the money with the calls and still get a premium that is close to the likely SPY dividend for this quarter  (around $0.50).   Schwab does not appear to offer access to this series of  options, but Fidelity does.

If SPY stays above 111 through this Thursday I expect these options will be assigned–because the premium left on the calls will be less than the dividend the stock will payout.   Friday is the ex-dividend date for SPY.   If the calls are assigned I’ll collect $0.42 per share.     If the options are not assigned, I will collect the SPY dividend–lowering my breakeven point to around 107.08.

For more info on this dividend capture strategy see this post

Ex-dividend, and pay/distribution dates for TIP are here.

TIP dividend history, click to enlarge

Ex-dividend and pay / distribution information for DIA is here.

DIA dividend history, click to enlarge

Ex-dividend and pay / distribution information for XLU is here.

XLU Dividend History, click to enlarge

• 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

DIA dividend history, click to enlarge

DIA did not payout any dividend this January. It appears that DIA had paid a dividend every month since at least 2002, so this is a very unusual event. Looking through the dividend histories of the 30 companies on the Dow Jones Industrial 30 Index it appears that JP Morgan & Chase Co. (JPM) might have been the culprit. Their January dividend dropped to $0.05 from last year’s $0.38 number in January 2009. Since DIA’s January payout tends to be one of the lower ones the DIA people might have decided this decreased payout wasn’t worth the trouble.

In some situations an effective way to hedge risk with a dividend capture strategy is to use covered call options.  If you are not familiar with options this might sound exotic, but it’s truly the training wheels of option trading.  With covered calls you can introduce yourself to the conservative, hedging possibilities of options while increasing your odds of making modest amounts of money.   Before getting into the details,  please review the checklist below, to see if you are ready / able to do this:

• Do you have enough capital?
  • This strategy requires you to buy hundreds of shares of stock to make it worth your trouble, do you have the money?
  • You can use margin to buy the stock, but that will increase your costs.

• Will you be content with a small gain?
  • This strategy is generally not effective with stocks with large dividends (e.g. 4% or higher).  It works better with stocks that offer annualized dividends in the 2% to 3% range
  • On the good news side, you generally get the small gain with less than 10 business days of investment

• Does the stock/ETF you want to capture the dividend on have a active option market?
  • If the options are thinly traded, or if appropriate strike prices are not available this strategy does not work

• Are you set up for at least the first level (simplest level) of options trading in your brokerage account?
  • If your account is not an IRA then you will need to have a margin account.  Don’t worry, there are no interest charges or chance of a margin call with this strategy (assuming you don’t buy the stock on margin)
  • This first level of option authorization usually allows covered calls and simple purchases / sales of puts and calls
  • Typically you can do these sorts of trades in a Roth / Traditional IRA — however you do need to apply for that capability if you don’t have it already

• Are you willing to learn about combo orders? These are orders that simultaneously fill your stock and options orders at a not-to-exceed price
  • These orders are prudent to use in fast moving markets, and when bid/ask prices are widely separated
  • Combo orders are not necessary if bid/ask spreads are small and if you are willing to do fast sequential market orders

Extra Credit

• Can you make your investment in an IRA account?
  • If so, this dividend strategy is more attractive, because you can defer taxes on any gains

Pass the test?  In my next post I’ll give some screening criteria for good positions and the basic setup of this dividend capture strategy.