Covered call writers and put-sellers must be aware of earnings report dates and ex-dividend dates but for different reasons. A golden rule in the BCI methodology is never to sell an option if there is and earnings report date prior to contract expiration. In July 2017, Terry sent me an email asking if ex-dividend dates should be treated in the same manner.
Terry’s email question
Would you treat a stock with an upcoming Ex-Dividend date in the same manner as a stock with an upcoming earnings report? For example, TOL has an Ex-Dividend date July 12th. Would you:
– Consider TOL as a covered call candidate as normal
– Exclude and move on to other candidates
– Wait until after Ex-Date to consider
– Buy stock now uncovered and cover after Ex-Date
Why avoid earnings report dates?
A disappointing earnings report can cause a huge gap-down in stock price resulting in a significant loss. Covered call writing and put-selling are conservative option strategies geared to retail investors with low to moderate risk tolerance. Since we know the date of the risky event, we avoid it and get back “in the game” after the report. The screenshot below shows earnings report gap-downs in August and December of 2015 for Toll Brothers Inc (NYSE:TOL):
Why avoid ex-dividend dates?
Ex-dates are the main reason for early exercise of options. We would look to avoid the ex-date if retaining the stock or capturing the dividend is a priority in our strategy. Avoiding sale of the underlying stock may be motivated to avoid tax issues if the underlying is of a low cost-basis. For me, it is not. My focus is solely on option premium and share appreciation in the case of out-of-the-money strikes. I’ll take it a step further…I consider it a positive if my shares are assigned early because that means I have maximized my current month trade and now have the cash available early to perhaps use to generate a second income stream in the same contract month.
How to deal with ex-dates
- Weekly options (sell Weeklys during each week of the contract month except the week of the ex-date)
- Selling options on or after the ex-date (especially if the ex-date occurs early in the contract month)
- Selling 2-month options to avoid the contract month of the ex-date
These strategies are detailed in the portfolio overwriting sections of both versions of the Complete Encyclopedias.
Discussion
Earnings report and ex-dividend dates are not treated as the same event. Earnings report dates are always to be avoided whereas ex-dates should be managed only when retention of the underlying security or capture of the upcoming dividend is a critical part of the strategy and trading style employed.
Market tone
US stocks moved up slightly this week with the CBOE Volatility index closing down at 9.59. A bullish jobs report on Friday capped a good week for stocks. This week’s economic news of importance:
- Factory orders for October came in at a better-than-expected (-)0.1%
- The trade deficit was wider than expected ($48.7 B/ $47.6B)
- Markit services PMI for November showed expansion (54.7) as did the ISM non-manufacturing index (57.4)
- Weekly jobless claims came in lower than expected (236,000/240,000)
- Non-farm payrolls for November was better than anticipated (228,000/200,000)
- The unemployment rate remains at 4.1%
- Consumer sentiment was lower than predicted (96.8/99.0)
THE WEEK AHEAD
Mon Dec 11th
- Job openings (Oct)
Tue Dec 12th
- Producer price index for Nov
- Federal budget
Wed Dec 13th
- Consumer price index for Nov
- FOMC announcement
- Core CPI
Thu Dec 14th
- Weekly jobless claims
- Retail sales
- Markit manufacturing PMI
- Markit services PMI
Fri Dec 15th
For the week, the S&P 500 rose by 0.35% for a year-to-date return of 18.43%
Summary
IBD: Market in confirmed uptrend
GMI: 5/6- Buy signal since market close of August 31, 2017
BCI: My portfolio makeup remains in a neutral bias, selling an equal number of out-of-the-money and in-the-money calls.
WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US
The 6-month charts point to a neutral outlook. In the past six months, the S&P 500 was up 10% while the CBOE Volatility Index (9.59) moved down by 5%.
Much success to all,