I've owned some Prospect Capital shares for a couple of years now. I was just looking at the options being sold and I got this idea. Wanted to see what everyone thought of it. I imagine similar stocks should generate similar results. I'm going to assume only buying 100 (the minimum to sell the contract) shares even though that's a small investment. The current share price and option prices might be a little off since they announced earnings yesterday and it caused some movement after hours (increase).
Current cost is $7.15 as of closing yesterday. They pay a monthly dividend of $0.06. So I'd receive 16 months worth of dividends before the contract expires. That's $0.96 per share. As of yesterday the mark for a $3 call with a Jan 17/2020 expiration was $3.85. Unfortunately, and probably the biggest flaw with this idea, the spread was $1.30 (max bid $3.20, ask $4.50). The bid + dividends basically = the share price yesterday so that wouldn't work but maybe a stock with more volume would allow this to work.
Assuming you bought the shares at $7.15 ($715 total) and sold the options at the mark ($380) total. You'd be out of pocket $335. You'd be collecting $96 in dividends by expiration. It's definetely going to close in the money so at expiration you'll get another $300 ending up in a $61 profit (+18.2% on the out of pocket amount, +8.5% on overall investment).
Obvious issues are getting the contract to sell at the mark with the ridiculous spread and tax implications which I'll admit I don't know off hand since I just started thinking about this.
Are there any other downsides I'm missing? Do the taxes basically ruin the concept?
Submitted August 29, 2018 at 08:25AM by mrdhood https://ift.tt/2N24sPg
