I understand that covered calls are synthetically equal to selling puts. How does this reconcile when meaningful dividends are included?
Example
VICI is currently priced at $28.00. VICI has a dividend coming for $.42 that goes ex dividend on 6/19 (before the monthly options expire). At the current moment, a $27.5 June call is $.85 (bid/ask of .75/.95). Back out the amount the stock is over the strike (50 cents) and you get $.35 of EV. And $27.5 June put is $.40 (bid/ask of .40/.45).
So I could buy 100 shares of VICI, sell that call and get $.35 of EV + $.42 on the dividend = $.77. Or I could sell the put and just get $.40.
I understand that covered calls with dividends can get called early if the EV goes to 0 at the time of the exdividend. Given the share price is close to this strike, I don't see that happening (but I could be wrong). Other than that, I'd much rather have 77 cents over 40 cents. That is a really big difference and doesn't seem "synthetically" equivalent. Can somebody explain if I'm missing something? Thanks!
Dividend Capture Covered Calls vs Short Put
byu/landonsilla inoptions
Posted by landonsilla
3 Comments
This synthetic terminology is misleading as a CC and short put can act very differently based on the account and how it is traded.
VICI is a REIT which is not really suitable for options on as there is little to no volume or premiums away from the money, so this is a very bad example.
In many margin accounts short puts can be opened for 10% or so of the stock value, without incurring interest, compared to the 50% margin required for buying shares and which would incur interest.
CCs have the share price locked in, but short puts can be rolled, and the strike changed so are more flexible.
As you can see, the “synthetic” thing is very misleading . . .
You didn’t account for the carry cost which would be interest earned on the $2800 if you sold the put. However, that amounts to about $8 for 22 days so that’s not the reason for the disparity. Given the option prices, they’re pricing it as if there’s no dividend. Odd, eh?
“I understand that covered calls with dividends can get called early if the EV goes to 0 at the time”
Not really. The rule is if the Corresponding Put is priced BELOW the dividend, the Call might be exercised. If it is a holder of the long Call can exercise, buy the Put and have a riskless profit.