Deep in the money put options on ex dividend

Deep in the money put options on ex dividend

This phrase applies to both calls and puts. Dividends are typically paid out in even amounts on a quarterly basis. While the math behind options-pricing models may seem daunting, the underlying concepts are not. The first three deservedly get most of writing put option sell to open 61 attention because they have the largest effect on option prices. But it is also important to understand how dividends and interest rates affect the price of a stock option.

You qualify for the dividend ifyou are holding on the shares before the ex-dividenddate.Many people have triedto buy the the shares just before the ex-dividend date simply to collect the dividendpayout only to find that the stock price drop by at least the amount of the dividendafter the ex-dividend date, effectively nullifying the earnings from the dividenditself.There is, however, a way to go about collecting the dividends using options.

On the day before ex-dividend date, you can do a covered write by buying the dividendpaying stock while simultaneously writing an equivalent number ofdeep in-the-moneycall options on it. The call strike price plus the premiums received should be equalor greater than the current stock price.On ex-dividend date, assuming no assignmenttakes place, you will have qualified for the dividend. While the underlySelling put options (deep in the money) is an alternative way of purchasing shares of a company.

More specifically, when one sells deep-in-the-money puts, it is equivalent to owning deep in the money put options on ex dividend corresponding shares as long as the stock price does not exceed the strike price of the options on their expiration date. The strategy exhibits certain advantages and suits well the profile of most investors that are interested in high-dividend stocks. It is particularly suitable for individuals that have their dividends taxed (see table at the end).The most important advantage is that the investor receives in full the time value of the options, which will be greater than the dividend if the strike price is properly selected.

We can see the activity in the regular February contract between the 2 and 425 strikes. Basically, professional paper is trying to take advantage of non-professional paper forgetting to exercise deep in the money options on the stock. A while back I wrote up on our Option Pit Blog describing how dividend plays work using Bristol Myers Squibb (BMY) as an example. At the end I ask (rhetorically) if retail traders should attempt to execute this trade, and the answer is no.

Deep in the money put options on ex dividend

Deep money in put dividend ex options on the

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