Buying Covered Calls for Dividend Strategy
Covered calls are a great way to turn most run ups into cash. You may want to buy a covered call when:
- The stock is about to run up, particularly for mid size dividends (5% to 15%) right before ex-dividend, or at the end of the cool down, and
- There is no risk of big swing in the stock price: no major news or event occuring during the run up, no strong a weak fundamentals, and no previous trend broken by the dividend cycle.
Should I buy a Covered Call instead of going long or Put/Call Options?
Covered Calls carry about the same risks as going long on a stock. However, with covered calls your gain potential is capped, but you make money if the stock stays flat or slightly up.
Covered Calls may not be the best choice if:
- There is risk in holding this stock. If you foresee an important event coming during the run up phase, or the stock has weak fundamental or was on a downward trend, you may want to edge the risk. In this case, consider buy a Put option or a Straddle. Or skip this play if the dividend is less than 3%.
- This stock has upside potential. If you are about to play a stock that has strong upward momentum, or with strong fundamentals, or you expect positive news may be coming, then you may consider buying a Call instead. Calls do not limit your upside gain potential, contrary to Covered Calls.
When should I buy a Covered Call?
Better to open your positions at the beginning of a run up phase, with an expiration date close to the end of the run up phase (ideally: the day before the ex-dividend date).
Usually, you want to buy the Calls at the strike price that closest to the stock price at the time you buy (help).
Buy 100 shares of stock for each Call you will be selling.
