DiviMo's Blog : ATT - Capturing the dividend

"Whatever share price T ends up today at, it will be lower tomorrow, due to going ex-div"

So why not wait until tomorrow? Then you get it cheaper by the amount of the dividend and you can make it back in capital appreciation which will give you tax benefits.

By buying the day of ex-dividend ... you are on the hook for taxes right now AND you lose the dividend anyway through stock decline. In essence you've made no money and owe taxes. BTW. If you delete or alter this comment in any way I will put in my own post.

Thanks for the comment.

However, the plan is to write a covered call aug20 32 on T which would provide me .30 premium or $30.00 per contract. If called (exercised), which is what I wanted, I would get an addtional .33 per share or $33.00 per 100 shares (bought at 31.67 and sold at 32.00). Of course this would happen from July 6 - Aug 20. I didn't want it to happen on July 5 or I would lose the div. My thoughts are after a few days, the stock would bounce back and hit 32. If I purchased the covered call tomorrow the premium would be less than today (as reasons stated by you and I). The bottom line, I get the dividend, the premium on the covered call and the small amount on the sale of the stock.

The other thing, as stated several times in my divimo posts, I am doing this in my tax-deferred account so am having no TAX consideration issues.

ATT (T)
Buy - Write

Buy 100 shr T... 31.67 $3,167 plus commission = -$3176
Write T call 20Aug 32 $30.00 premium plus commission = + 23.00 per cont

Situation (1) On July 5 the call is exercised at 32
Results ($3200 - 3176 = $24... ($24 - 9commission) = $15.00 profit on stk
$23.00 profit on option
Net profit (one day)..................................................................38.00 profit per contr

Situation 2. My preferred situation. Call is exercised from July 6 - Aug 20

Results ($3200-3176 = $24 minus $9 commission = $15.00 profit on stk

$23.00 profit on option
Dividend paid Aug 1.......................................................... $43.00 profit on div
Net
profit................................................................................$81.00 per contract

Yield.on capital secured ($3176) , about 2.5% if need to wait to aug20 else yield % is better. Annualized this is better than 12%.

Situation 3... fall back plan July 6 - Aug 20
Call option is not exercised, stock never goes up to 32.
Results:
Dividend paid Aug 1...............................................................$43.00 per 100 shrs

Stock and Call> If stock drops, can buy back Call at lower price then can..
Call write new call on stock at lower strike price. (laddering down on covered calls)
or
Can sell stock at loss
or
Can keep/hold stock ongoing for dividend purposes.

My expectations , and it's only my informed opinion, is that T is likely to be higher priced in the near future. The plan is to go back and work on getting income using T as the underlying stock in selling puts and buy-writes (buying stock concurrent with writing covered calls). I am less concerned about capital appreciation on the stock and more involved in getting income via dividends and option plays. It might not work as I plan but am giving it a shot.

And yes, by not buying the stock today and waiting for July 6, I would lose the dividend payment for this quarter. By the way, I am writing this as a public diary forum format... on what I am doing in my tax deferred account. The main purpose is for me to write down my thoughts and then go back to them to see if they worked out or not. I expect some failures along the way.

But you can't write calls like you propose. Here is why ....

There is a wide spread on calls in high dividend yielders. This wider spread is a "discount" which accounts for the effects of dividend distribution. You can place your limit orders, but it is unlikely to get filled ... unless ... the price of the stock rallies as the expiration approaches. In any case ... the limit order will fill when it is sufficiently close to the BID to induce buyers who are discounting "ex-dividend".