covered calls and dividends

[OverTheTop]

I'm in the process of thinking of new strategies. what do you guys think of the following trading strategy:

1. you pick a stock with a moderately high dividend you would like to own
2. you buy it near its ex-div date and collect the dividend
3. you sell a covered call

you pocket the dividend, and the covered call premium. 2 bangs for your buck. is this too simplistic? or am I missing something?

[kerahc]

Originally Posted by OverTheTop

I'm in the process of thinking of new strategies. what do you guys think of the following trading strategy:

1. you pick a stock with a moderately high dividend you would like to own
2. you buy it near its ex-div date and collect the dividend
3. you sell a covered call

you pocket the dividend, and the covered call premium. 2 bangs for your buck. is this too simplistic? or am I missing something?

It's one of the simple trades out there but can be effective. Simple does not mean bad. When you sell options you want to give as little time as possible for the buyer to be right which means you want to sell close to experation options when doing this trade. The downside is the premium you get for selling the call will be very little since the dividend will be priced in already.

There are two different ways to play this situation and I love the one that follows:

Market makers look for stocks that pay large dividends and sell the ITM call options and at the same time they will buy the same ITM options. They will the execute the call options they bought in hopes that the options they sold will not get executed. What happens is they will collect the dividend and hopefully not get executed and profit from the premiums also. This is great for the market makers and others that take the same trade. Where I come in is I look for the same stocks and watch the options action. The day after the execution date I put on a bearish put spread at the open. The reason why this works is that all the market makers and others that played that trade will now have all the stock in their accounts and need to unload it. This is a large amount of selling pressure on the stock beyond what it had felt the previous days. With that in combination of others just normally selling the stock after a dividend you see the stock go down and your puts go strongly into profit. It's simple and quick but it's not one for the faint at heart so using spreads is very inportant. Anyone else play this kind of trade?

[Leth]

selling options.....scary.

sounds like you have a good strategy overthetop. if you impliment it...keep us informed on how well it works. im quite curious actually.