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"Do I Receive Dividends After Writing Calls?"

Question By Mike Sabo

"Do I Receive Dividends After Writing Calls?"

If I sell call options against a dividend paying ETF such as JNK, do I still collect the dividend?

Asked on 1 June 2010

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Answered by Mr. OppiE

Hi Mike,

It is not immediately clear from your question whether you are writing call options while also owning the dividend paying ETF or that you are simply writing naked call options on a dividend paying ETF. Even though your choice of the word "against" in your question quite suggest the former, I shall cover both situations here for completeness sake.

If you already own a dividend paying ETF or stock such as JNK and is writing call options against it, you are putting on what is known as a Covered Call options trading strategy. A covered call strategy allows you to collect call options premium as "rent" while continuing to hold the stock and enjoy all the benefits that ownership confers, including dividends. Yes, you still collect dividends if you write call options against dividend paying ETF or stocks that you own. However, the real question is, does that mean that writing covered calls on dividend paying stocks makes you more money than writing covered calls on non-dividend stocks or ETFs? Not really. The problem with call options premiums is that it is significantly lower for dividend paying stocks due to the possible effect of dividends on the price of the stock than it is for non-dividend paying stocks. In fact, you could do a quick research on the premium for slightly out of the money call options for dividend paying and non-dividend paying stocks and you will find that generally, the premium is significantly lower for dividend paying stocks and especially for high dividend yield ETFs such as JNK.

If you do not own the underlying stock and is merely writing naked calls against dividend paying ETFs or stocks, you will not get dividends. In fact, you won't be receiving dividends if you went long on the call options either. Also, writing naked calls on such high dividend yield ETFs and stocks makes you very little premium as mentioned above so you are not only getting no dividends, you are also getting lesser profits.

In conclusion, you will continue to recieve dividends if you merely wrote call options on dividend paying ETFs or stocks that you own even though the premium on such call options would be significantly lower than the premium of options on non-dividend paying stocks.

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