saving the dividend when writing covered calls

In one of your replies, you mentioned there was a process to predict if a call that I sell will be exercised buy the buyer so that he / she can receive the dividend. You also
mentioned you had a way of somehow saving your dividend. Can you share your insights into how you do this.



Hello TR

1) There is no way to be certain that a call will or will not be exercised for the dividend. That's because individual investors often make poor decisions. But assuming the call is in the hands of a professional market maker, the option will be exercised (and you will receive an exercise notice) the day before the stock goes ex-dividend when:
The option is in the money (that part is obvious) AND
The bid for the option is NOT above it's intrinsic value (in other words, there is zero time premium in the option) AND
The option's delta is 100.
2) You may be assigned an exercise notice when the above is almost true (98 delta for example), but not often.

3) The call may also be exercised for the dividend when the corresponding put is inexpensive.  Here's why:
Assume the market maker can exercise the call option to collect a $0.30 dividend.

If he can buy the put (same strike price as the call with the same expiration date) for X, and if the interest cost to own the stock from the exercise date through expiration is Y, he will exercise if X+Y < $0.30.  Reason: The long stock plus the long put is exactly equivalent to owning the long call.  Thus, if he can make a small profit by exercising for the dividend,  he will do so.
4) The only way to save the dividend is to repurchase the call you sold earlier.  Note: once you receive an exercise notice, it's too late.  Your stock will have been sold.  But if you buy back the call before the stock goes ex-dividend, and before you are assigned an exercise notice, you will own the stock and collect the dividend.  But please understand:  You will be naked long the stock.  Thus, if you are into writing covered calls, I'd suggesting writing a different call (usually out a month or two or three) at the same time that you repurchase the soon-to-be-exercised call.

If any part of this reply is not clear, write again.

Mark D. Wolfinger
The Rookie's Guide to Options:
The Beginner's Handbook of Trading Equity Options