This is a FullyInformed Members strategy article on Apple Stock. A recent correspondence with an investor whom I will refer to as Mary, brought up the question of her position in Apple Stock as it relates to the upcoming dividend. With the recent rise in Apple Stock, Mary is holding deep in the money covered calls at the $400 strike for May 18 options expiry. On May 9 the stock goes ex-dividend, meaning that anyone who holds the stock as of May 8 will earn the $3.05 dividend.
Apple Stock and Deep in the Money Covered Calls
Since Mary’s Apple Stock covered calls are deep in the money, there is not enough call premium left between the price of the stock and the buy to close price of the $400 call strike to avoid being exercised from the stock. This makes the dividend of $3.05 beneficial to the investor who bought the covered calls from Mary. He will definitely exercise his right to take the shares no later than May 8 to earn the dividend. When I sell covered calls against stock I own, I believe the buyer of my covered calls should do some work for his money. In Mary’s case she can make it a tougher choice for the investor who bought her covered calls whether to exercise her for the shares or to hold off. Meanwhile Mary can squeeze more from her deep in the money covered calls before finally giving up her shares. Let’s take a look at a simple strategy she can apply.