Dave-re: long call & declared dividends...
Hi Dave,
How are you?
Though away, peaked and saw your question. Always remember your help from prior, therefore reply.
I have a stupid question.
Please don't feel that way, my friend. We are here to learn, grow and laugh all the way to the bank together, aren't we ;-)?
Take care.
di
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IF you are long an option when a dividend is declared, does the dividend accrue to you as the option holder?
CBOE and L. McMillan explained this concept quite well.
From L. McMillan's "McMillan on Options", p.20-21:
>>>An equity call holder ISN'T entitled to the dividend, so an ITM call that has no time value premium will drop in price by the ex-dividend amount.
Hence if an ITM call has no time value premium on the DAY BEFORE the stock goes ex-dividend, the call holder will generally exercise in order to preserve his value. The call seller, who is assigned, doesn't find out until the next day (the morning that the stock is going ex-dividend). Thus, the seller finds out that he actually sold the stock on the previous day, and thus he does not get the stock dividend. For this reason, it is often the case that when a stock declares a large cash dividend, the terms of the option are adjusted. Such a adjustment protects the call holder.<<<
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Recall put-call parity relationship, Dave? Can't show the formula, for my keyboard lacks a few functions (for now ;-).
From CBOE's textbook, "Options Essential Concepts & Trading Strategies", p. 53:
>>>Reviewing the basic three-way position of long stock, long put, an short call, we now ask: How would this position be affected if the stock paid a $1 dividend?
Without the dividend, the position at the stated prices broke even. The presence of a $1 dividend, therefore, would imply a $1 profit. But what would competitors in the marketplace do when they saw the opportunity to make a $1 profit? Some professional traders or arbitrageurs would be willing to settle for a smaller profit, say 75 cents. Consequently, they would be willing to pay 25 cents more for the put or the stock or sell the call for 25 cents less. Other professional traders would be satisfied with only a 40-cent profit, and their bidding and offering would raise put prices and lower call prices.
Competition in the marketplace would thus raise put prices or lower call prices (or a combination of both) until the basic three-sided stock and option position was a back to breakeven. The conclusion to be drawn is that the presence of dividends has the effect of raising put prices and lowering call prices .<<< |
