Monday, April 22, 2013

Options 2.0 – Part 17. Dividend & early exercise call options - part 2

Dividend & early exercise call options – part 2

Let’s return to the Ahold example of last week, Thursday, April 11th, 2013.

Be careful with dividend!
Last week we revealed that there is only one optimal moment to exercise call options early: on the last trading day before the ex-dividend date. According to certain criteria, a call option is ‘early exercise' and you're better off financially if you receive the dividend or sell the call option before the ex-dividend date.
By going ex-dividend you also prevent a value decrease in the call option. Such a value decrease results in unnecessary loss.

Real life scenario: Ahold is listed ex-dividend today
This morning (April 19th), Ahold shares are listed ex-dividend. The dividend amount is EUR 0.44. Yesterday Ahold closed at EUR 11.71. Subtract the dividend amount of 0.44, and you arrive at a theoretical opening price of 11.71 - 0.44 = 11.27. And that’s what you see reflected in the actual opening price: Ahold opened this morning at 11.33 (a minus of 0.38). The latest price (at the time of writing this article) at 09:10 is 11,265. That’s 0.445 less than yesterday's closing price. You see: that’s roughly equivalent to the dividend amount of 0.44. Take a look at our sample calculation in the table below:

What does this mean for Ahold Options?
If you were long in Call options that were ‘early exercise' yesterday, then this would cost you money today. Calculate it:
Call Apr-13 10.50 will go from a closing price of 1.21 to a bid price of 0.75. That’s 0.46 lower.
Call Apr-13 11.00 will go from a closing price of 0.71 to 0.26. That’s 0.45 lower.
Call Apr-13 11.50 will go from a closing price of 0.21 to 0.03. That’s 0.18 lower.

If you were long on one of these options series yesterday, then you would see a significantly lower value on your screen this morning. This could easily have been prevented by:
  • Exercising these ‘early exercise’ options early on the last trading day before ex-dividend (so yesterday). You’ll receive the shares and today, obtain a dividend of EUR 0.44 per share.
  • Or you could have sold the options before the ex-dividend date.
So, one thing you as an options investor shouldn’t do is: stay long on ‘early exercise’ call options and silently hope that the dividend will catch up. This can be a good strategy if you invest in shares, but not when you invest in options.

Ex-Dividend in conclusion
If you’re long in ‘early exercise’ call options on the last trading day before ex-dividend, exercise these options early or sell them. I hope that the impact of dividend and ex-dividend is much clearer now!

Dividend Agenda:
Next week, the following option classes will go ex-dividend:
·       Corio EUR 2.76 dividend, ex-dividend 22nd April
·       Ten Cate EUR 0.50 dividend, ex-dividend 22nd April
·       BinckBank EUR 0.28 dividend, ex-dividend 24th April
·       Wereldhave EUR 3.30 dividend, ex-dividend 24th April
·       ASML EUR 0.53 dividend, ex-dividend 26th April
·       BAM Groep EUR 0.10 dividend, ex-dividend 26th April
·       Vopak EUR 0.88 dividend, ex-dividend 26th April
·       Wolters Kluwer EUR 0.69 dividend, ex-dividend 26th April

Please note that this example is for illustration and education purposes only and does not incorporate transaction costs. This example is not a recommendation.

Herbert Robijn is founder and director of FINODEX ( FINODEX develops innovative online investment tools for private equity and options investors. These cutting-edge tools allow investors to make a comprehensive market analysis, complex calculations and appropriate selections, at just the touch of a button.

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