Assigned on NUE Covered Call, Profit of $240 in 6 Days, 1% Return on Capital or 44% Annualized

On March 24 we established a Covered Call on NUE. The objective of the trade was to capture a dividend of $.405 (ex-div on March 30). We purchased 500 shares of the stock @$69.17 and wrote 5 “in the money” Apr 1 $67 Call options for a premium. of $2.64 per share . The call option premium provided 3.8% protection against a potential decline in stock value before we could collect the dividend.

The graph shows what happened after the CC was established. NUE stock had a run up in price (blue line) and closed yesterday at $78.75. At the close we were generating profits of $4,790 on the stock and a loss of $3,331 (red line) on the options.

The owner of the calls elected to call the shares away last night so they could collect the $.405 dividend. We sold the shares at $67 resulting in a loss of $1,,085 on the stock. Our short options became $0 and generated a profit of $1,394 resulting in net position profit of $240. Graphs shows the impact of the assignment with stock losing, option gaining and a small net profit.

$240 is not a lot of money in an account of any size…..but with market dynamics and volatility so hard to predict it was a reasonably “safe” trade that generated an annal return of 44%. They key is stringing a series of these “dividend capture” trades together on a weekly basis. In this situation the return on our investment was higher with the shares getting called away but the after tax gain would likely be higher collecting the dividend (taxed at a lower % than the gain on stock/option). We have five similar trades in play this week. My concern with the strategy is having one of the stocks experience a big decline that would offset the benefit of many smaller gains. If the strategy works over time we can easily scale the size of the trades to generate higher $ returns. If the stock falls below the short strike price we have an option of continuing to sell calls against the stock or selling the stock.

WMB Covered Call Dividend Capture – Assigned day before ex-div, Return on Capital 2.6% in 2 days or 476% annualized…..but no dividend

On Mar 9 we established a covered call on WMB by purchasing 500 shares of WMB at $24.16 and selling a Mar 12 $23.50 Call. Share price appreciated after the purchase. On 3/10 we bought back the Mar 12 $23.50 covered call and sold the Mar 12 $24 covered call to avoid the shares getting called away before the ex-div date of 3/11. The stock closed at $23.99 on 3/10. Last night the shares got called away as the dividend of $.41 was too attractive to the holder of the short call. Unfortunately we don’t get to collect the 500 shares x $.41 dividend but the transaction generated a good return for a 2 day investment. To avoid assignment we could have bought back the Mar 12 $24 Call and sold the Mar 12 $25….but we didn’t check the position prior to market closing and thought the earlier roll from $23.50 to $24 had protected the dividend.

A $385 profit in an account of any size isn’t very significant on a “one off” basis. If the practice of “capturing dividends” works over we will increase the number of shares/options in the position. Main concern is a “bad” week when the market/stock drops more than the protection offered by the dividend and we incur a large loss that wipes out the cumulative gains from the past weeks.

The trade ideas are coming from a screen on (paid subscription). The screen identifies candidates for the strategy and recommends a strike price. The strike prices are mostly “at the money”. Writing “in the money” options would increase the downside protection but it would also reduce the return. Plan is to identify 5 to 10 candidates for the strategy each week. For tax purposes I would prefer to capture the dividend versus getting the shares assigned and generating a short term capital gain (although any “gain” is preferred versus a loss!).