Write a cover call for dividend stocks

Verizon’s call option pricing

Option expiration

Exercise price $50.00

Strike price $52.50

Exercise price $55.00

June 19, 2015

1.02 USD / 1.07 USD

0.21 USD / 0.24 USD

0.03 USD / 0.05 USD

July 17, 2015

1.21 USD / 1.25 USD

0.34 USD / 0.37 USD

0.07 USD / 0.11 USD

August 21, 2015

1.43 USD / 1.48 USD

US$0.52 / US$0.56

0.16 USD / 0.19 USD

Verizon’s call option pricing

Please note that for the same strike price, the option premium will increase as the expiration date increases. For call options on the same expiration date, their value decreases as the strike price increases, because call options give the holder the right to buy stocks at a higher price than the current market price.

Therefore, determining the appropriate coverage call option is a trade-off between the expiration date and the strike price.

In this case, we will decide to use the $52.50 strike price call option because the $50 call option is already slightly in the money (this increases the possibility of the exercise option and the stock being redeemed before expiry), and The $55 call is too low to guarantee our interest. Since we are writing the phone, we must consider the buying price, because this is the price that market participants are willing to buy from you.

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To understand the potential increase in returns from selling these options, we can use the following formula to calculate the annualized implied rate of return:

Annualized premium (%) = (option premium x 52 weeks x 100) / (stock price x remaining weeks to maturity)

Therefore, the June call option of $52.50 will provide a premium of $0.21 (or an annualized rate of return of approximately 2.7%), while the July call option will have a premium of $0.34 (annualized rate of return of 2.9%), and the August call option will have a premium It is US$0.52 (annualized rate of return is 3.2%).

Each call option contract represents 100 shares of the underlying stock. Suppose you buy 100 shares of Verizon stock at the current price of $50.03, and you issue an August call option of $52.50 for these stocks. If the stock rises above $52.50 before the call option expires and is called, what is your return? If the stock is redeemed, you will receive a stock price of $52.50 and you will also receive a dividend payment of $0.55 on August 1. Please note that $2.47 is the difference of $50.03 between the price received when the stock is redeemed and the initial purchase price.

Therefore, your total return is:

($0.55 dividend received + $0.52 call option premium received + $2.47*)/50.03$ = 7.1% in 17 weeks.

This is equivalent to an annualized rate of return of 21.6%.

If the trading price of the stock is not higher than the strike price of $52.50 by August 21Yingshi, The call option will expire without being exercised, and you will keep $52 (that is, $0.52 x 100 shares) minus the full premium of any commissions paid.

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Now, what if the ex-dividend date of VZ shareholders is August 20?day• You will receive $0.55 per share, and the stock will fall by approximately this amount, thereby reducing the value of the call option. However, due to anticipated dividends, call options are often priced below the price suggested by the put-call parity-even if there is any excess profit from the strategy, it will be minimal.

Pros and cons

There seems to be a split on the wisdom of calling for stocks with high dividend yields. Based on this view, some options seniors believe that it makes sense to always generate the largest possible return from the investment portfolio, and therefore support call options on dividend stocks. Others believe that the risk of stocks being “recovered” is not worth the meager premium obtained through call options on stocks with high dividend yields.

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Please note that blue chip stocks with relatively high dividend payouts are usually concentrated in defensive industries such as telecommunications, finance, and utilities. High dividends usually suppress stock price volatility, leading to lower option premiums. In addition, since stocks usually reduce the amount of dividends when they go ex-dividend, this has the effect of reducing the premium of call options and increasing the premium of put options. The lower premium for selling high-dividend stocks is offset by the fact that they are less risky of being called back (because they are less volatile).

Generally speaking, a guaranteed bullish strategy is suitable for stocks that are the core holdings of a portfolio, especially during periods of sideways or range fluctuations in the market. Due to the high risk of stock being eliminated, it is not particularly suitable during a strong bull market.

Bottom line

Buying stocks with above-average dividends can increase portfolio returns. However, if you believe that the risk of these stocks being bullish is not worth the modest premium you get for selling call options, then this strategy may not be suitable for you. In addition, the efficient market has pre-priced the dividends in the call option premium, which has weakened some of the attractiveness of the strategy.


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