Buy / Write

sle · Dec 7, 2017

jimmyjazz said:
sle, in your experience does the lowering of the call value (and raising of the put value) mostly effect the nearest expiry to ex-dividend? I'm not sure I'd expect an option over 2 months out to be that sensitive to a near-term ex-dividend date.

Usually dividend schedule and dividend dates are more or less known way in advance.

Or do you mean if a company suddenly announced a dividend or changed the amount? That, from options pricing perspective, be equivalent to the stock price dropping by that exact amount. So all options would be effected roughly by the amount of their delta. IRL, however, when this happens the div change propagates through the whole curve (e.g. if the company raised their div by 15c unexpectedly, all further divs will be changed too) and longer dated options will be effected more. Not only that, but also MMs will probably mark the dividend growth at more conservative levels too.

jimmyjazz · Dec 7, 2017

No, I was just wondering if far expiry option prices actually reflect near term dividend payouts. At some point the expected future value (volatility?) should swamp small dividend events.

Let's say we're looking at a dividend aristocrat like T. Expectation should be that the next 4 quarterly dividends will happen and that they won't get cut. (Maybe they'll increase?) Does a 1 year LEAP actually price out in such a manner that those impending 4 quarterly dividends are accounted for? Seems like a small effect. I don't know how we could discern signal from noise.

sle · Dec 8, 2017

jimmyjazz said:
Let's say we're looking at a dividend aristocrat like T. Expectation should be that the next 4 quarterly dividends will happen and that they won't get cut. (Maybe they'll increase?) Does a 1 year LEAP actually price out in such a manner that those impending 4 quarterly dividends are accounted for? Seems like a small effect. I don't know how we could discern signal from noise.

Yes, those LEAPs will be pricing in all of dividends. It's pretty easy to see - pul up the option chain and see at what price does put price equal to the call price. That strike minus the spot price is your "forward drop" which is a combination of the dividends/borrow and interest rates.

jimmyjazz · Dec 8, 2017

OK, thanks. For T ($36.17), I see the Jan19 $36 combo price as $0.08, which feels like a wash. Annual dividend is $1.96, so it seems like I could buy the stock and short the synthetic, capturing the dividend with almost no risk. Sure, it's "only" 5.4%, but for no risk? What am I missing? I guess the stock could get called away if it's ITM.

viruscore1 · Dec 8, 2017

The bottom line, the stock behaved 80% as predicted, and profit was made on the trade. The theoretical experts should post a live trade to prove their setups.

sle · Dec 9, 2017

jimmyjazz said:
OK, thanks. For T ($36.17), I see the Jan19 $36 combo price as $0.08, which feels like a wash. Annual dividend is $1.96, so it seems like I could buy the stock and short the synthetic, capturing the dividend with almost no risk. Sure, it's "only" 5.4%, but for no risk? What am I missing? I guess the stock could get called away if it's ITM.

It's not "no risk", you are short convexity if you think of it. Say you trade a combo and buy the stock. If the stock goes up enough, it gets called away before the ex-div date and you are stuck with a put that's going to be pricing much lower at that point. Since these are American options, you have to look at combos where the put is DITM.

jimmyjazz · Dec 10, 2017

Understood. Thanks.

FSU · Dec 10, 2017

sle said:
It's not "no risk", you are short convexity if you think of it. Say you trade a combo and buy the stock. If the stock goes up enough, it gets called away before the ex-div date and you are stuck with a put that's going to be pricing much lower at that point. Since these are American options, you have to look at combos where the put is DITM.

I'd have to disagree with SLE here. If you buy the conversion, (long stock, long put, short call) Your only risk is a change in interest rates (upward) or a change in the dividend (down).

If your stock gets called away early, that's a good thing. You will have your long put on for free, anything you sell it for will increase your profit.

newwurldmn · Dec 10, 2017

FSU said:
I'd have to disagree with SLE here. If you buy the conversion, (long stock, long put, short call) Your only risk is a change in interest rates (upward) or a change in the dividend (down).

If your stock gets called away early, that's a good thing. You will have your long put on for free, anything you sell it for will increase your profit.

You buy the stock and you sell the forward with an implied dividend (some discount) and you don't realize the dividend (get called away). That's how you lose money.

viruscore1 · Dec 10, 2017

newwurldmn said:
You buy the stock and you sell the forward with an implied dividend (some discount) and you don't realize the dividend (get called away). That's how you lose money.

Sure I missed the dividend but I made $1200 return after comm in a couple of weeks from call premium and capital gains.