ex-dividend and options
- Thread starter misterkel
- Start date
Yeah, already priced in. Nothing to adjust unless it's a special dividend (the correct term for this is escaping me right now)--if it's a normal quarterly or annual dividend, it's priced in.
This is something to consider when you enter the position--your broker probably flashes something at you in yellow if you try to buy an option subject to a dividend.
Atrp2biz gave you a perfect answer. It is not necessarily "priced in" if your call is deep in the money, as it wont go less than parity. By exercising the call, and buying the put (for less then the dividend), you capture the "extra value" of the call by getting the dividend (you then have the synthetic call long stock and long put)
The strikes of US equity options are not adjusted for ordinary dividends. If your calls were in the money, you can expect to lose almost as much as if the stock price were simply to drop by $0.87 when the market opens. If your calls were deep enough in the money, you could lose almost $87 per contract, given no change in the underlying price other than the adjustment for the dividend.
I'm not any kind of financial advisor, but here is my attempt at algebraically expressing when I think one should exercise US style options just before the ex-dividend date (and repurchase them afterward if you want). I believe you should do so if the following is true:
in_the_money_amount > dividend + premium_before_dividend_date + exercise_and_repurchase_costs_including_bid_ask_spread
For options that are substantially out of the money, and for all puts, their values will mostly have the dividend priced in, because the dividend will not make it much more compelling for holders of the substantially out of the money calls to exercise and it will not make it more compelling at all for holders of puts. Attempting to express this quantitatively too, I believe that the price of an US equity option (call or put) of strike k for a stock issuing a one dividend before the expiration date of the option would be the same as the following combination position for the stock if it not to distribute those earnings as a dividend.
1 long option (call or put) at strike k, expiring just before ex-dividend date.
1 short option (same type) at strike k minus dividend, also expiring just before the ex-dividend date.
1 long option (same type) at strike k minus dividend, expiring at the expiration date of the real option,
...with the imaginary restriction that if you want to exercise this, both long options get exercised and the short option gets assigned.
[Editted to correct places where I wrote "78" instead of "87."]
Last edited:
This is false. The calls would already be discounted by the dividend prior to x-div.
As I write this, 1,200 $70 August 18 calls for HCN are being visibly offered for $2.35 while the stock is trading at $71.83, a premium of $0.52, which is, importantly for this example, less than the recent $0.87 dividend.
In reality, stock prices have fluctuated as usual for the past two days, but had the stock price remained completely constant since the day before it went ex-dividend, and adding in the dividend for the pre-dividend price, it would have been trading before the dividend at $72.70. If, at that time, "the calls would already be discounted by the dividend prior to x-div", the $70 call should have already been available for today's asking price of $2.35 plus a little more to back out the theta decay, so, let's say $2.40. If that were true, you could have gotten filled on combination orders to buy the $70 call at $2.40 and short the stock at $72.70, then exercised the call for an immediate profit of $0.30 per share minus commissions, and you could have repeated the process many times throughout the day, making a fortune, or maybe just $36,000 minus commissions if those 1,200 contracts were the only ones on offer.
I believe option sellers are, in reality, not so stupid to make such offers before the ex-dividend date.
I encourage you to look for examples by watching the dividend calendar at http://www.nasdaq.com/dividend-stocks/dividend-calendar.aspx . Keep in mind that today is a somewhat bad day to look for examples, as most of these stocks only have options that expire on the third Friday of the month, which is still two weeks away, and the market has had some news to digest over the past 24 hours (grand jury rumors then surprisingly good economic data), so it is harder to find examples this morning where option premiums are really low. My point should be easier to see if you look at very stable stocks going ex-dividend closer to options expiration day, ideally when there is relatively little economic news.
Last edited:
What does the remaining time value have to do with the dividend?
Why would the calls drop in value by the dividend when holders of the calls do not receive dividends? They do not, therefore if there is an automatic drop in the calls x-div there would be free money.
I encourage you to look at ATM options for dividend any non-dividend paying underlyings with an x-div date within the remaining life of the option. You'll generally notice that for non-paying dividend underlyings, the calls will be slightly higher than the puts. However, for dividend paying underlyings, the reverse is true.
Try about 1.15 in premium. 71.87 - .87 div = $71. $2.15 (midpoint) option gives 72.15 break even on 8/18