Dividends in options

[j4mesa]

Dear all,

Quick questions regarding options:

1. When do we receive dividends in regards to the options position?
2. When do we have to pay dividends in regards to the options position?
3. And how do we benefit from those circumstances?

Extension For question 1, in what circumstances do we receive dividends in regards to your position in PUT options?

Thank you ALL !!

 

[Mofra]

j4mesa,

Dividends are paid to the holder of the underlying equity. By holding the right (but not the obligation) to exercise a particular option, you do not hold the physical stock so will not receive or pay the dividend.

Dividends do effect the pricing of ETOs so it is always worth confirming if there is a dividend entitlement due that will effect your position.

Link to handy pricing tool thet includes adjustments for dividends (thanks WayneL from months ago):

http://www.hoadley.net/options/optiongraphs.aspx?divs=Y

 

[sails]

LOL j4mesa - quick questions on a complex subject. Oh, if only it were that easy!

Agree with Mofra that only those holding the stock will receive dividends. One is usually liable to pay the dividend if short stock.

Options do not give dividend entitlement or liability in themselves. However, as Mofra has pointed out, the dividend is factored into option pricing for the relevent expiry months. Suggest you experiment with the Hoadley calculator he has suggested and note the option pricing with the dividend set to zero. Then enter a dividend amount you will see how the pricing changes. Try this with both puts and calls and will give you some idea of how dividends are factored into option pricing.

Probably the biggest trap with options and dividends is being short calls that are assigned the day before ex-div date. Problem is, you don't know that someone has exercised their long calls until the next day when it is too late. Then you find there is a heap of short stock in your portfolio - meaning you will be liable for the dividend amount (and possibly franking credits - but not sure on that one). Technically, IF the share price falls by at least the amount of the dividend, the short stock position can be closed out for something close to the dividend - technically offsetting the dividend amount you have to pay. Too much risk for my liking though.

Dividends do complicate options considerably and I'm no expert in the mathematics of it all. Just know enough to (hopefully) keep out of trouble!

 

[wayneL]

Heres another Hoadly calculator that graphs the effect of dividends on premium.

http://www.hoadley.net/options/dividendgraphs.aspx

 

[Whiskers]

:topic

Curiosity has got the better of me.

Wayne, what is Romoretad?

Did a google and all it gave was you.

And what is that in the barrel!?

 

[wayneL]

Curiosity has got the better of me.

Wayne, what is Romoretad?

Did a google and all it gave was you.

And what is that in the barrel!?

Romoretad is an anagram of Moderator.

That thing in the barrel is a share market investor.

 

[Whiskers]

Romoretad is an anagram of Moderator.

Should have guessed. Like undercover, secret society, secret codes and all that stuff again eh.

Geez, now I'll be looking for codes and hidden messages everywhere.

Kennas... sekann... http://www.terapisnack.com/members/sekann.html

Hey, what's going on here... that anagram of kennas or is kennas an anagram of sekann, and that site is the same format as Joes.

Wish I could understand what it's about.

Just to keep nominally on topic... there's a couple of options here that may pay dividends. :