Options Bootcamp #43 – Options and Dividends

Published on: Apr 28 2014 by John Critchley

Featuring: John J. Critchley, Jr- Senior Option Specialist at SogoTrade.com

Basic Training: Options & Dividends

  • How do option holders collect dividends?
  • How do derivatives impact options?
  • What happens to call and put prices when dividends enter the equation?
  • If you are an options holder what must you do to collect a dividend?
  • What are dividend plays and how do they work?

     

     

Mail Call: International trades, closing positions, and more

  • Question from Glenn Baker – Question for Options Boot Camp I’ve been listening to Options Boot Camp since the first episode & have been listening to the Option Block for about 2.5 years. I currently have a Schwab account where I primarily buy mining stocks.  I would be interested in possibly switching to Sogotrade for the lower commissions.  Does Sogotrade allow you to buy stocks on Canadian exchanges? Thanks and I really enjoy the show.”
  • Question from Nick Snow – Hello. First, thanks for all the shows. I used to listen to options insider years ago. Somehow lost the podcast and recently found it again. Good news there is I have been listening nonstop for the last 2 weeks.  Second, for the real reason. I have been trading for a while (retail only) and in listening into your shows, particularly Boot Camp. I have heard “close your credit positions, if I had a nickel for every time a person came to me and said this crazy event happened and it wiped me out”. I do close my credit positions at $0.20-0.05 every time. But I have wondered if outside of the commission, has anyone ever done a risk reversal? Or roll down to a lottery ticket? E.g. I sell bull put or bear call spread. I go to close the position at 80% of my profit and there’s a day or two left. If I just closed my short leg and left the long on, or even just swapped my short leg for a lower short now making my spread a debit albeit a supper cheap debit spread lottery ticket. I could capture those freak events that you always talk about. By my count in options boot camp I would have 128 nickels for those freak events mentioned. :) Any thoughts? Am I missing something? Sincerely yours.
  • Question from Abe – Can you make an episode on how to repair losing options trades? I enjoy listening to your show, it keeps me going while I am slaving the night shift at work. Thank you!
  • Question from Greg S. – I am looking for some advice from an experienced options professional regarding stock replacement using American-style calls. Really the question comes down to- for a higher dividend yielding stock, should I be buying a LEAP or rolling out approximately every three months after exercising very close to expiration and capturing each dividend?  I get that the dividend lowers the price I pay the longer dated the options are, but does not reflect as much as if the options were available as European-style. It seems that if the dividend yield is high enough, the American style can’t fully compensate the option holder for the missed dividends as the value can’t drop below intrinsic value. Does this call for the shorter term options to capture each dividend? The caveat seems to be that the roll out should cost more extrinsic value on ex-dividend. Since I have a buy-and-hold objective, euro-style or warrants would be ideal to avoid transaction costs, but again, not available. So far, I have been rolling an ITM call option position on a relatively high dividend yielding (5-7%) stock I have wanted concentrated exposure in as part of my overall portfolio but limited risk.  It makes regular scheduled quarterly dividend payments and the timing of the annual increases is known to occur in Q1 each year. Well just yesterday (day before ex-div for my stock), I figured I would skip the dividend capture and roll out the May contract to the August one cheaper than I could today because today it trades ex-dividend.  I confirmed this using the CBOE calculator, holding price constant.  It showed the time value paid to roll should have been more today due to trading without the dividend vs. yesterday.  Though just eyeing the bid x ask spread it didn’t appear to do so by much and implied volatility looked to be the same.

Itunes http://itunes.apple.com/us/podcast/options-boot-camp/id514144367

Stitcher: http://stitcher.com/listen.php?sid=971812

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