Dividend Capture for Phillip Morris

After my attempt last week to capture the SPY dividend, I thought I would try a different tack.

Why Bother?

Why try to figure out a way to capture dividends? You make pennies. But they are high quality pennies. Any time you can lock in a return, even a small one, that is very high quality money. We will do the return calculation at the end to see if it is worth it.

Today’s Target

Phillip Morris (PM) goes ex-dividend tomorrow, 24th September, paying $0.58 in a few weeks. So today is the come date. In the money call owners who want the stock will call it away today. And call owners who fear a drop in the value of the call will sell their call today.

So I thought that I would buy stock and sell calls so that the stock would be called away. I would get the time premium in the call. So I need a call that is in the money and has a small enough time premium to make it worthwhile for the call owner to call it away.

Which Call To Sell?

This is the Oct in the money call option chain, 7:30 this morning, before the market opens. (Click on the picture to enlarge.)

The 48, 47, and 46 calls are trading with the dividend payment already accounted for. Notice that their implied volatility is lower than the historical volatility of the stock. The deeper in the money calls’ bid and ask bracket PM’s price, 48.93. they have no time value left. So there is nothing to do here.

Let’s look at the Nov option chain for the in the money calls.  (Click on the picture to enlarge.)

We can make a table to make it easier to compare.

To me, it looks like the Nov calls with strikes 46 and lower will be called away. The 47s and 48s have too much time premium and so are too expensive to be called.

As a further check that this is the baseline implied volatility level, we look at Dec too.  (Click on the picture to enlarge.)

Expected Return

So buying a share of PM and selling a 46 Nov call would cost $48.93 – $3.2 = $45.78 and if it is called away, we make $0.27 time premium. So the return is approximately one half of one percent. The risk is that the stock isn’t called away.

I will report back later.