Let's say, ABC costs $100 and declared annual $10 dividend in early September. You sells a covered Sep20'24 110 CALL @ 2 waiting for the dividend gap price drop before it is expired. The ABC price grows to 110 before the dividend and the option is immediately executed. You've been owned or you already got enough profit?
Posted by psv0id
1 Comment
I think you meant **exercised**. We take options out for a walk, not drag them in front of the firing squad. 😀
And in any case, a covered call gets *assigned*, not exercised.
The math is pretty simple.
If you just held shares and no CC, you’d net $10/share in cash when the dividend pays and you’d expect the share price to be $10/share less (although nothing says it can’t go up an extra $4.20 or down to $69 on the same day), so you end up with a total portfolio value of $11000 (plus/minus any additional gains/losses on that day) and still hold 100 shares, so $10000 is unrealized equity.
If you held the CC, you net $12/share in cash when the call is assigned and your shares are called away at $110/share. So your total portfolio value would be $11200 all in cash and you wouldn’t be impacted by any additional gains/losses on the shares.
Where you lose with the CC is if at the time of assignment the share price goes above $112. Then holding shares wins.