Friday, August 14, 2015

Rollover IRA Roll Out: Avoiding Early Exercise

Probably the #1 reason that covered calls are exercised early is to capture a dividend. This happens when an equity nears its ex-dividend date and the time value of an in the money call is less than the value of the dividend. This week my position in ED/Sept 18 65 Call was in just that situation.

Using the "Ask" price we have:

With a $0.65 dividend coming up and only $0.53 worth of time value you can be pretty sure that these options are going to be exercised. So what can I do?

The obvious answer is "buy to close". That would have cost $1,100.00 (plus commission). And we'd end up like this:

That's not too bad. We end up with a theoretical $110 gain, collect the dividend September 15 and all is well, right? Well, maybe not. On the ex-dividend date we can expect the equity to trade lower by the amount of the dividend. In our case that's 500 shares times $0.65 for $325.00. I do want to keep the stock in my account so let's look at another possibility: Roll Out.

Thursday I executed the order you see above. I simultaneously bought the 9/18 65 to close and sold the 11/20 65 to open for a net $0.75 credit or $375.00 (less $16.74 in commissions) and preserved my September 15 dividend of $325.00. The ex-dividend date for the December dividend will be the sometime about the first week of November so I'll need to keep an eye on this position when November rolls around. 

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