Dividend Capture with Covered Calls

Combining dividends with covered calls can boost your income, but requires understanding the risks.

The Strategy

  • Own dividend-paying stock
  • Sell covered calls
  • Collect dividend + premium

    • Ex-Dividend Considerations

    Early Assignment Risk

    Deep ITM calls may be assigned before ex-date when:
  • Time value < dividend
  • Call is close to expiration
  • Stock is significantly ITM

    • Why? Call buyer can exercise, collect dividend, and come out ahead.

    Protecting Your Dividend

    To keep your dividend:

  • Sell OTM calls (less assignment risk)
  • Avoid selling calls with < 1 week to ex-date
  • Close ITM calls before ex-date

    • Example: JPM Dividend Capture

    JPM quarterly dividend: ~$1.15/share

    Strategy:

  • Own 100 JPM shares
  • Sell OTM covered call
  • Collect dividend + premium

    • Monthly income:

  • Covered call premium: $150
  • Quarterly dividend (monthly equiv.): $38
  • Total: $188/month

    • Best Dividend Stocks for Covered Calls

    | Stock | Div Yield | Option Premium | Combined | JPM2.5%8-12%10-14% XOM3.5%6-10%9-13% VZ6.5%4-8%10-14% T6.0%5-9%11-15%