Thursday, June 29, 2017

Pricing of CC (Covered Calls) versus CSP (Cash-secured puts)

I had an interesting discussion with someone on Reddit regarding a CC versus a CSP. I've always felt the CC was more profitable over a dividend event, because the call holder could exercise it early to prevent me from getting the dividend. However, tracking the NUE position overnight (which made a difficult comparison because it jumped in price overnight in addition to going ex-dividend) showed otherwise. 

 From the discussion:

 The situation at the close:
NUEStrikeCall BidExtrinsicPut BidExtrinsicExtr Diff
$56.86$56.50$0.69$0.33$0.65$0.65$0.32
$56.86$57.00$0.46$0.46$0.92$0.78$0.32

 But, bottom line -- if the CC and CSP had been written at the close, the outcome as of the ex-dividend date would have been:
  • $57 CC: -$56.86 + $0.46 + $0.3775 + $57 = $0.9775 
  • $57 CSP: $0.92
  • $56.50 CC: -$56.86 + $0.69 + $0.3775 + $56.50 = $0.7075
  • $56.50 CSP: $0.65
All in all, the CSP would have been easier, although slightly less profitable. There's also no delay between ex-dividend date and payment date of the dividend. Cleaner transactions all around.
The $0.06 difference between the two is due to that $0.32 variance yesterday. That is, the CSP's only collected $0.32 of the $0.3775 dividend.
But given the $0.32 variance had to be corrected overnight, doesn't that suggest some type of advantage could be exploited? What about a "Dividend Champion" that pays a dividend over $1, such as MMM?
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2 comments:

  1. JEFF PARTLOW: THE COVERED CALLS ADVISORJune 30, 2017 at 3:46 AM

    Good observation Randy. I have found that most often, initially entering a short cash-secured Puts position provides a very slightly better annualized-return-on-investment potential in comparison to its comparable covered call. However, the opposite is true (as your article describes) if there is an intervening ex-div prior to the options expiration date.

    Example using CSCO: Ex-div of $.29 on 7/5
    1. If Covered Call: Buy shares at yesterday's closing price of $31.41 and sell-to-open July 21st $31.00 Call options @ $.64 (midpoint of bid/ask prices). Potential profit of $.52 per share ($.29 dividend plus $.23 time value in Call options); or
    2. If Short Put options: Sell-to-Open July 21st $31.00 Puts @ $.48 (midpoint of bid/ask).
    The $.64 Covered Call potential is substantially better than the $.48 potential in the short Puts.

    In any case, it is always desirable to compare the CC versus its equivalent CSP before establishing any new investment to determine if either provides a somewhat better ROI potential.


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  2. JEFF PARTLOW: THE COVERED CALLS ADVISORJune 30, 2017 at 3:50 AM

    Correction: second sentence in #2 in my prior comment should say: "The $.52 Covered Call potential is better than the $.48 potential in the short Puts."

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