# Option price behaviour around Ex-Div time



## RichKid (2 June 2005)

I'm trying to learn how option prices react to Ex-Div events and how the market makers behave too. I was looking to short NAB (NABJ2 July 2950 put), noticed price is about the same as it was yesterday. Today it's exDiv and it dropped almost the full div amount (83c). The market maker offer is always about 2 to 3 cents above fair value (using CommSec options calculator), which is quite a bit considering the option is only in the mid teens (about 14c atm). The MM bid is always about half a cent below the fair value bid too from observation. NAB is above $31 which is a crucial level imo.

I nearly bought yesterday but didn't like the spread or the fact that I had no idea what would happen.  Clearly the div is built into the price and just because NAB drops doesn't mean I'll be rich. In fact the option payoff diagramme I tried (peter Hoadley) didn't quite show me that I'd be pretty much in the same place as yesterday- maybe the market makers and the option pricing models prevent easy profits like this. I note IV is low around 14% so i thought this would be a cheap way to short it. I expect NAB to drop below $31 to maybe $30 in the next two to three weeks. I'll see if I can find more info about how div's affect options pricing and how these crooked MM's behave. Any views by people who use options around Div time- simple strategies are easier for me to understand so I just like straight puts.


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## money tree (2 June 2005)

quite simply, everyone knows the stock will drop by the div amount, so option prices reflect this move before it happens. But.....options also cannot trade for less than intrinsic value.......so often if you buy a call cum div it can fall the next day. 

The basic rule for trading options around div time is:

DONT


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## RichKid (2 June 2005)

money tree said:
			
		

> quite simply, everyone knows the stock will drop by the div amount, so option prices reflect this move before it happens. But.....options also cannot trade for less than intrinsic value.......so often if you buy a call cum div it can fall the next day.
> 
> The basic rule for trading options around div time is:
> 
> DONT




Thanks very much Money Tree, a lot to learn in this game for sure.


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## wayneL (2 June 2005)

Rk,

You can evaluate these things using the greeks. As MT alluded to, it comes down to extrinsic value, intrinsic value and delta.

You were looking to buy a put, cum dividend? 

If the option is near the money, then extrinsic value is at its maximum, so the mm's will adjust for the div amount, if the value is sufficiently high as MT said.

You can go far OTM to lessen extrinsic value, but I'm afraid extremely low delta and low gamma will work against you.

However, you can go further ITM where the delta is close to -1. Extrinsic value will be close to nil enabling you to capture the ex div drop in price. But of course you leave yourself open to much more risk also.

Cheers

P.S. hmmmm reading over that it seems difficult to understand. All this greek stuff IS hard to learn...certainly took me a hellava long time anyway.


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## RichKid (2 June 2005)

wayneL said:
			
		

> Rk,
> 
> You can evaluate these things using the greeks. As MT alluded to, it comes down to extrinsic value, intrinsic value and delta.
> 
> ...




Thanks Wayne,
A lot more to it than meets the eye, thanks for explaining Money's post, I didn't even realize I'd missed that much- I still don't get it fully but will work on it. Also thanks for letting me know that it took you awhile to get your head around it- I thought you must be one of those idiot savants they talk about in commodities trading, the ones that can do hundreds of mental calculations on their feet and make millions through arbitrage- all while in that chaotic pit. But unlike some savants you have a sense of humour and you're sociable so maybe your maths is just really really good instead of phenomenal.

I'm reading an old book by Hugh Denning called Equity Options (heard of it? it's been around for about 15 years, local author)- haven't found as much detail as there is on ASF but I'm getting there slowly I think. Guy Bower and Chris Tate are keeping me company too, I'll keep working on understanding those payoff diagrammes.


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## wayneL (3 June 2005)

RichKid said:
			
		

> Also thanks for letting me know that it took you awhile to get your head around it- I thought you must be one of those idiot savants they talk about in commodities trading, the ones that can do hundreds of mental calculations on their feet and make millions through arbitrage- all while in that chaotic pit.




{Story about mm test in other thread}

Ahahaha 

Idiot - sometimes!

Savant - definately not! I sweated blood to learn what I have so far...with much more still to do!

I found I would have to leave it alone for a while, then come back to it and try and pick up another concept, then leave it for a while...and so on....still doing that really.

Cheers


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