Today on Know Your Options, Liz & Jenny discuss the ex-dividend date, and why it is so important to be aware of when trading options.
Dividends are distributed to shareholders, usually in cash, and they represent a portion of the company’s earnings. In thinkorswim, there is a little green dollar sign symbol next to any positions you hold that have a dividend coming up. In the long run, holding dividend stocks can be beneficial if the stock continues to rise, because the stock owner is receiving extra distributions of cash that other stocks do not offer. In the short run however, we view this as a zero sum game. This is because the stock price is reduced by the amount of the dividend, so there is no arbitrage play around dividends.
The ex-dividend date is when the trader must own the stock by to receive the dividend. If the trader is shorting the stock, they will have to pay the dividend if they are short the stock at this time.
When it comes to options, additional assignment risk near dividend distributions only applies to ITM calls that have less extrinsic value than the actual dividend. If you think about it from the call owner’s perspective, it makes sense for them to give up their extrinsic value to exercise the option, because the amount they are giving up will be made up by receiving the dividend.
Liz & Jenny walk you through the steps to take to check for assignment risk in your ITM calls. They exemplify this using BA, AAPL, IBM & WAG. Since OTM puts give you a rough idea of the extrinsic value left in ITM calls, traders can check the pricing of the OTM put on the same strike as their ITM call. If the value is equivalent to or just under the amount of the dividend, the short call will be at risk of being assigned before the ex-dividend date.
To eliminate this risk, the trader can roll their ITM option out in time until the extrinsic value exceeds the amount of the dividend. It is important to remember this, because in many cases rolling out to the next expiration cycle could still leave the ITM call at risk.
This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.
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