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What Is Dividend Risk? | Options Trading Concepts
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- Опубликовано: 4 фев 2016
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Excellent clear explanation. Mike as usual.
Another great presentation by Mike!
Question: So if the call owner wants to exercise early to capture the dividend value, would he/she need to exercise their right to purchase the underlying shares 3 business days before the ex-dividend date? I say 3 days because the clearing house and stocks usually take 3 days to settle and record the transaction in their books? Also, what about in margin accounts?
Nope - although it may take that long to officially settle, as long as the shares are owned before the ex-dividend date it would qualify.
If I BUY a call premium and hold it through a dividend release, am I susceptible to dividend risk? I do not sell calls.
Thank you for the explanation! What if I sell a vertical call credit spread. The stock price then increases a lot so that both short and long call options are deep in the money. Somebody will exercise my short call and assign stock to me so that they collect the divident. But I still own a long call at a slightly higher strike price. Will my long call protect me from the divident payment? Can my long call be tied to my short call in such a way that as soon as my short call is exercised, it will trigger exercising of my long call instantly? In this situation will my loss be only the difference between the strikes of my spread, or will I still loose additional value of the divident? Your help appreciated.
You'd most like owe the dividend because "brokerage" assigned you the short shares on the short call leg on the night before ex-div in after hour. On the morning of ex-div day if you don't have fund they would force exercised the long call to covered the short shares. Washed out the shares but left you with max loss of the spread width and at the same time since you shorted stock on the day before the ex-div and on early morning of ex-div you're on the hook to pay the dividend. That is my understanding according to the video above.
I had far OTM Iron Condor, I got assigned on a leg. Why would someone do that? its not even ITM I had to pay dividend and lost $150. I really don't understand why OTM shorts gets assigned?
Because the person who bought the call option has the right to exercise their call option no matter what, even if it’s not profitable at the time. It doesn’t have to make sense why someone would buy shares of a stock for more than they are worth. Also, sometimes someone might rather exercise their call option just so that call option doesn’t expire worthless. That way at the very least they now own 100 shares of a stock that can appreciate in value and make them money long term.
That’s why people open call debit spreads. If the short call is assigned out of the money, then the long call will allow us to buy 100 shares of the stock at a share price that is lower than the share price we were assigned to sell our non-existent shares at. This way the difference between the share prices multiplied by however many spreads we opened is our max risk, which is why we have to pay what it costs to open up the spread in the first place, just in case of assignment we already know how much money we could potentially lose before the spread is even opened.
@@taibutler1474 I have a question if I have a call debit spread on spy and it still has 2 more month till expiration day and I hold it through divident day will it be assigned early?
Great stuff. Ty Mike
So a short put in the money won't be affected during ex dividend? I have a number of short puts and got caught off guard when the market drop and have been just rolling but some now are so much in the money I can't do that except for a debit.
how do we know when the dividend is paid?
who picks cash or stock as a payment option
Good question!
There is a "payable" date, which is usually about a month after the record date. That is the date that the dividend is actually paid. Whether it is cash or redistributed as shares would be determined by your preference. Your broker should have an option to choose between the two.
If I sold the call in your example and get early assignment the ex dividend day, do I have to pay the extra 25 cents as dividend to the other party as part of the transaction
Does this happens only if the early assignment is exactly in the ex dividend day?
What if the early assignment happens the day before or after?
You would need to be assigned BEFORE the ex-dividend day. Luckily assignments can only happen when the markets are closed, so if it IS ex-dividend day and you still have the ITM short call you won't be assigned for the dividend payment. If you are assigned before the ex-dividend day, you'd be liable for the dividend payment. Only long and short shares that are held on ex-dividend day are liable for the dividend.
Is there dividend risk when selling puts? How can this risk be calculated?
There is not in terms of assignment - People that exercise puts end up selling their shares, or if they didn't have shares they would be short stock. This means that they would either A) Not get the dividend, or B) have to pay the dividend if they ended up being short shares. Therefore, dividend risk usually applies to short calls that are ITM, as the other party is long the call and needs to exercise the call to become long the shares to receive the dividend.
Sometimes the price is up in dividend day
Is there a dividend risk when selling covered calls?
Can I say if I avoid trading non-dividend stocks/ ETFs, dividend assignment risk becomes impossible?
Does this apply to people with LEAP Call options? (I just bought a call. I'm not selling.)
No, assignment risk in general is only a risk to whoever sells an option and therefore would not apply to anyone who has bought an option. If you buy an option you won’t even have to worry about being assigned since it’s impossible.
Does it make sense to buy a long option and the money to try to get someone’s dividend?
It does not. Dividends are only distributed to shareholders, so you'd need to own the stock prior to ex-dividend.
YOoo dude If i sell a short call ITM for lets say this Friday expiration, and it expires ITM(bull call debit spread). And the ex dividend date is three weeks from this Friday. I will still owe the dividend?
well explained! Thanks
So, if a stock has no dividend can we still be at risk?
yes - any short option that is ITM can be assigned at any time, but it is rare if the option has a lot of extrinsic value left - option owners that exercise literally give up that extrinsic value, so they'd be better off selling the option and getting long/short the stock instead of exercising, to retain that extrinsic value.
tastytrade thanks for responding but I’m not talking about the assignment part, I’m talking about the dividend, am I going to be obligated to pay dividends even if the stock doesn’t distribute them like FB, Tesla?
if i own 100 share of xyz, and I build a bearish vertical call spread around it as down side protection, if the short call becomes in the money they can exercise it on me... ? dang!
What if I buy the stock and then sell prior to the ex-div day?
Then you would release the shares, and you would not receive the dividend.
Are dividends priced into OTM call options? Lets say the dividend was $0.50 and the delta on my OTM calls was 0.20. When the stock drops by the amount of the dividend, will the value of my calls drop by $0.10?
Good question! Dividends are a little funky and will FULLY account for the amount of the dividend. To prevent arbitrage opportunities, the options must account for the dividend so this is a case where delta is virtually ignored. Regardless of the strike's delta, each option will account for the drop of the stock price from the dividend.
You guys are the best. Happy holidays T.T.!
Is this the same for puts
It is not actually - short calls are only at risk because call owners must exercise their option to own the shares of stock prior to the ex-dividend date. With puts, exercising would mean being short 100 shares and the short party would be responsible for paying out the dividend.