What if you could earn 15-25% annually from a combination of dividends and options premiums? By strategically combining dividend stocks with options strategies, you can create an enhanced income stream that significantly outperforms traditional dividend investing.
The Dividend-Options Connection
Dividends and options interact in important ways that income traders can exploit:
- Call options lose value before ex-dividend dates (priced in dividend)
- Put options gain value before ex-dividend dates
- Early assignment risk increases for in-the-money calls before dividends
- Stock typically drops by the dividend amount on ex-date
The opportunity: By timing options trades around dividends, you can collect both the dividend and enhanced options premiums, while also protecting against the typical post-dividend price drop.
Strategy 1: Covered Calls on Dividend Stocks
The classic combination. Own dividend stocks, sell calls, and collect both income streams.
Covered Call + Dividend Example
Own 100 shares of Verizon (VZ) at $40 ($4,000 position)
- Quarterly dividend: $0.665 per share ($66.50)
- Sell monthly $42 covered call for $0.80 ($80)
- Monthly option income: $80
- Monthly dividend (averaged): $22
- Total monthly income: $102
- Monthly yield: 2.55%
- Annual yield: 30.6%
Key insight: The 6.6% dividend yield becomes 30%+ when combined with covered calls.
Timing Covered Calls Around Dividends
- Before ex-date: Sell calls that expire after the ex-dividend date to capture the dividend
- Strike selection: Sell slightly OTM to reduce early assignment risk
- Watch for early assignment: ITM calls may be exercised early to capture dividend
- Roll if necessary: If call goes ITM before ex-date, consider rolling up and out
Strategy 2: Cash Secured Puts on Dividend Stocks
Get paid to wait for dividend stocks at lower prices, then collect dividends once assigned.
Put Selling for Dividend Stocks
Want to buy Realty Income (O) at $50 (currently $55)
- Sell $50 put expiring in 45 days for $1.50 ($150)
- If assigned: Buy at effective cost of $48.50
- Monthly dividend: $0.256 per share ($25.60)
- If not assigned: 3% return in 45 days, sell another put
The math: You either collect $150 premium or buy a 5.5% yielding stock at a 12% discount. Win either way.
Strategy 3: Dividend Capture with Protective Put
Buy stock before ex-date, buy a put for protection, and capture the dividend safely.
Protected Dividend Capture
Target: AT&T (T) with $0.28 quarterly dividend, stock at $17
- Buy 100 shares at $17 ($1,700)
- Buy $17 put expiring just after ex-date for $0.40 ($40)
- Dividend received: $28
- Net profit: $28 - $40 = -$12 (small loss)
Wait, that is a loss? Yes, basic dividend capture usually does not work because the stock drops by the dividend amount. You need to enhance it with selling calls.
Strategy 4: Collar Around Dividend
The collar protects downside while generating income around the dividend.
Dividend Collar Strategy
Own 100 shares of Johnson & Johnson (JNJ) at $160
- Quarterly dividend: $1.24 ($124 per 100 shares)
- Sell $165 call expiring in 60 days for $3.00 ($300)
- Buy $155 put expiring in 60 days for $2.50 ($250)
- Net credit: $0.50 ($50)
Income breakdown:
- Dividend: $124
- Net options credit: $50
- Total 60-day income: $174
- Annualized return: 6.5%
- Max loss limited to 3.1% ($155 put protection)
Strategy 5: Synthetic Dividend Capture
Use options to create dividend-like income on non-dividend stocks.
Creating Synthetic Dividends
AMZN pays no dividend, but you want income from it
- Own 100 shares of AMZN at $175 ($17,500)
- Sell monthly $180 call for $4.00 ($400)
- Monthly "dividend": $400
- Annual "dividend": $4,800
- Synthetic yield: 27.4%
Tradeoff: You cap upside at $180, but create significant income from a zero-dividend stock.
Income Calculation: Full Portfolio
Here is what a $100,000 dividend-options portfolio might generate:
$100,000 Portfolio Income
| Stock | Div Yield | Call Premium | Total Yield |
|---|---|---|---|
| VZ ($20K) | 6.6% | 18% | 24.6% |
| T ($20K) | 5.8% | 20% | 25.8% |
| O ($20K) | 5.5% | 12% | 17.5% |
| JNJ ($20K) | 3.1% | 10% | 13.1% |
| KO ($20K) | 3.0% | 9% | 12.0% |
**Weighted average yield: 18.6% ($18,600 annual income)**
Compare to 4.8% average dividend yield alone: $4,800. Options add $13,800 in income.
Early Assignment Risk
When you sell covered calls on dividend stocks, watch out for early assignment:
- ITM calls: Most likely to be assigned early to capture dividend
- Day before ex-date: Highest risk period for early exercise
- Time value matters: If extrinsic value is less than dividend, expect assignment
Avoiding Early Assignment
- Sell OTM calls (strike above current price)
- Sell calls with expiration after the ex-date has passed
- Close or roll ITM calls before the day before ex-date
- Check extrinsic value - if less than dividend, expect assignment
Early Assignment Check
Stock at $52, sold $50 call for $3.00, dividend is $0.50
- Intrinsic value: $52 - $50 = $2.00
- Extrinsic value: $3.00 - $2.00 = $1.00
- Dividend: $0.50
- Extrinsic ($1.00) > Dividend ($0.50)
- Early assignment unlikely - owner would lose $0.50 by exercising
Best Dividend Stocks for Options
Look for stocks with:
- High dividend yield: 3%+ preferred
- Liquid options: Tight bid-ask spreads
- Moderate volatility: 20-40% IV for good premiums
- Stable dividends: Consistent payment history
- Weekly options: Available for more flexibility
Top Picks
- Telecom: VZ, T
- REITs: O, SPG, STOR
- Utilities: SO, D, DUK
- Consumer: KO, PG, MO
- Healthcare: JNJ, PFE, ABBV
Tax Considerations
- Qualified dividends: Lower tax rate (0-20%) if held 60+ days
- Option premiums: Short-term capital gains (ordinary income rate)
- Consider IRAs: Tax-advantaged accounts eliminate tax drag
- Track cost basis: Options premium affects your stock cost basis
Track Dividend + Options Income
Pro Trader Dashboard tracks both your dividend income and options premiums. See total yield, ex-dividend dates, and income projections for your entire portfolio.
Summary
Combining dividends with options creates a powerful income strategy. A portfolio yielding 4% from dividends alone can generate 15-25% when enhanced with covered calls and cash-secured puts. The key is understanding how options and dividends interact, managing early assignment risk, and selecting the right stocks.
Start with high-yield stocks you want to own long-term, add covered calls for extra income, and watch your yield multiply.
Want to explore more income strategies? Check out covered call income or learn about managing an options income portfolio.