Playing changes in dividend policy through options

E

evogel

Hello everyone !

I would appreciate help regarding my question. Let's imagine that there is an optionable stock and company don't pay any dividends. Options are priced so far as there will be no dividends at year 2020. I'm ready to bet that the company will start to pay big dividends soon but I don't want to have risk of stock's price change so i don't want to simply buy stock or calls . My intention is to capture dividends with options.

So far I suppose that I should either
  1. buy spot and short synthetic (sell 1 year ATM call and buy 1 year ATM put) or
  1. buy spot , sell 1 year deep in-the-money call , buy 1 year deep out-of-the-money put with the same strike (also synthetic short but it's easier to trade),
so i think that after dividend's announcement calls should become cheaper and puts become more expensive all else equals.
But honestly speaking I'm a little bit unsure about early exercises. So is it possible at all to capture dividends through options if my bet is correct and company will start to pay dividends soon ?

Thank you so much in advance !
 
A conversion is a delta neutral spread. Buy Stock, Buy Puts, Sell calls. If you can do that at prices that make sense without the dividend and there is one, and the short call is not assigned early, you will profit from the divided.
 
Thanks for your answer.
I never faced this situations before so in practical meaning it's not clear for me whether the probability of short call being assigned depends on moneyness or not. I suppose that if for example stock is fluctuating between 100 and 110 then call with strike 100 has less probability of being assigned after dividend announcement than call with strike 80, right ?
 
The more in the money, the better the chance. The basic formula is that if the value of the dividend exceeds the put value on that strike including the cost of carrying the stock, most MMs would exercise for the divided. Being long stock and long the put has more value than long call with the same risk-if you get the dividend on the stock.
 
Does this logic also works for very high strikes ? For example do I also have high risk of puts assignment if I sell 150 call and buy 150 put in the example above ?
 
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