Dr. Alan Ellman | Apr 23, 2017 01:46AM ET
Covered call writers must factor in dividends into our investment strategies. More specifically, ex-dividend dates for these are the dates shareholders must own the shares to benefit from the dividend distribution. Call buyers must exercise the option prior to the ex-date to capture the forthcoming dividend. This makes our shares subject to early exercise (exercise prior to contract expiration). Relating to this topic, I recently came across an email I received a few years ago with a proposed covered call strategy involving dividends and market timing and thought this would be an interesting strategy to evaluate.
The strategy proposed in this email
This was presented by a well-known timing service and I am wondering if there is any merit to this strategy. Here’s how it works:
Any thoughts on this strategy?
Evaluating a proposed strategy, the Blue Collar way
I believe that a proposed strategy should be evaluated with an open mind. Whether we accept it or reject it, a fair appraisal will be a valuable learning tool. There also may be one or two ideas that we glean that can be integrated into our current strategy. The learning process never ends!
In my view, the best way to determine the value of an investment strategy is to fully educate yourself in all aspects and then paper trade for an appropriate time frame, usually several months. Here are my preliminary thoughts playing devil’s advocate:
Option Expiration Cycles
(Feel like I just completed a term paper!).
Discussion
Now based on these initial thoughts it would appear that I am skeptical and I am. But let me go back to my original premise that to really know the value of a strategy we must fully educate ourselves and then paper trade. I hope you find my thoughts useful in the educational aspect of evaluating this approach. These ideas should not eliminate this strategy from our consideration but rather strengthen the basis of our analysis.
Market tone
Global stocks edged up for the week as investors focused on positive US corporate earnings and overlooked increasing geopolitical tension and a likely delay in US tax reform. Oil prices declined, with West Texas Intermediate dropping to nearly $50 from last week’s close of $53.25. Volatility, as measured by the Chicago Board Options Exchange Volatility index, dropped to 14.63, down from 16 last week. This week’s reports and international news of importance:
THE WEEK AHEAD
MONDAY, APRIL 24th
· Chicago Fed national activity index
TUESDAY, APRIL 25th
· Case-Shiller home price index Feb.
· Consumer confidence index April
· New home sales March
WEDNESDAY, APRIL 26th
· None scheduled
THURSDAY, APRIL 27th
· Weekly jobless claims 4/22
· Durable goods orders March
· Pending home sales March
FRIDAY, APRIL 28th
· Gross domestic product Q1
· Employment cost index Q1
· Consumer sentiment (final) April
For the week, the S&P 500 moved up by 0.85% for a year-to-date return of 4.91%.
Summary
IBD: Uptrend under pressure
GMI: 4/6- Sell signal since market close of April 17, 2017
BCI: I am currently favoring in-the-money strikes 2-to-1, a defensive posture, no change from last week
WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US
The 6-month charts point to a neutral to slightly bearish outlook. In the past six months, the S&P 500 was up 10% while the VIX (14.63) also rose by 10%.
Original post
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