When I've looked at short term equity options just before ex-div, the div was somewhat evenly distributed across the put and the call. On ex-div day both adjusted by that amount. So I'm confused because the put decrease was not equal to the dividend. How does this position offset at 100% ?
Position Question\Advice needes
- Thread starter orimsh
- Start date
rmorse
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It's were the value is. Let's take a simple example. 10 days to expiration, stock trading at 40, I'm trading the 43 puts/calls, and the next day there will be a .25 dividend. Let's say the call is trading .05/.07. My market on the put would be 3.25/3.35. I'm willing to buy the put .25 over parity with the stock and get the call for free (-interest/comm). The following day, the stock I buy against the position will not receive the dividend. All things equal, my call market might drop to .04/.06, but only from decay. My put market would now be 3.00/3.10, again looking to get the call for free with the hedge.
or you could cover the shares and buy 69 okt puts
Thanks, that makes perfect sense but it doesn't reconcile with my sometimes failing memory
So I popped your numbers into my ancient pricing program and it verified your numbers to the penny (hmmmm, still scratching my head...)
However, when I used the IV that your numbers generated but changed the strike to OTM, the result was what I had previously described:
10 days until exp
39 strike
.25 div
put = .47
call = 1.22
UL goes ex-div and 1 day later the premiums are:
put = .35
call = 1.35
The 25 ct dividend is split b/t the two options.
So either my pricing model is defective or your example is for ITM options and since the OP's position is ITM, that's why it applies here. The latter? Appreciate your time...
rmorse
Sponsor
Quote from spindr0:
Thanks, that makes perfect sense but it doesn't reconcile with my sometimes failing memory
So I popped your numbers into my ancient pricing program and it verified your numbers to the penny (hmmmm, still scratching my head...)
However, when I used the IV that your numbers generated but changed the strike to OTM, the result was what I had previously described:
10 days until exp
39 strike
.25 div
put = .47
call = 1.22
UL goes ex-div and 1 day later the premiums are:
put = .35
call = 1.35
The 25 ct dividend is split b/t the two options.
So either my pricing model is defective or your example is for ITM options and since the OP's position is ITM, that's why it applies here. The latter? Appreciate your time...
I made up a simple trade for understanding purposes only. I did not enter anything into an option program for exact prices.
orimsh, i meant:
cover the stocks and buy some other puts to hedge the ones that you are short
cover the stocks and buy some other puts to hedge the ones that you are short
that could effect a loss for the downside....
I mainly want to get rid of this position (-69 deep ITM put & -6900 spy shares) in order not to be charged next month for the dividend which is usually 50-60 cents....
FSU - following to your fisrt relpy - didn't get exactly why should not be concerned about the dividend... even though the puts will loss the div premium on Friday I would still be charged next month for the dividend...?....
I mainly want to get rid of this position (-69 deep ITM put & -6900 spy shares) in order not to be charged next month for the dividend which is usually 50-60 cents....
FSU - following to your fisrt relpy - didn't get exactly why should not be concerned about the dividend... even though the puts will loss the div premium on Friday I would still be charged next month for the dividend...?....
You would still pay the dividend, but the puts would drop by the same amount. You have no risk with this position other then being synthetically short the 135 calls. If you insist on taking the position off, as I said earlier, do it as a spread.
All other posters suggestions to buy other puts, etc, will create a new position, which may or may not make money. You have a perfectly hedged position (other then being short the 135 calls synthetically) that will neither make or lose money.
You're really missing the point. The numbers that you "made up" happen to be darn close to what an option program would spit out if one used your inputs. So it's not a question of the accuracy of your numbers.
In your example, all of the div is priced into the puts since they're ITM. But in the example that I provided, the div was not 100% priced into the puts. If that's true, then the answers to the OP that it's a wash when his SPY goes ex-div may not necessarily be true. He'd have to run a pricing program to determine how close to a wash it would be.
I don't know the answer but so far, all of this doesn't add up for me.