25 lines
1.7 KiB
Plaintext
25 lines
1.7 KiB
Plaintext
Good and Bad Dates with Models
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Using an incorrect date for the ex-date in option pricing can lead to
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unfavorable results. If the ex-dividend date is not known because it has yet
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to be declared, it must be estimated and adjusted as need be after it is
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formally announced. Traders note past dividend history and estimate the
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expected dividend stream accordingly. Once the dividend is declared, the
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ex-date is known and can be entered properly into the pricing model. Not
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executing due diligence to find correct known ex-dates can lead to trouble.
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Using a bad date in the model can yield dubious theoretical values that can
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be misleading or worse—especially around the expiration.
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Say a call is trading at 2.30 the day before the ex-date of a $0.25
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dividend, which happens to be thirty days before expiration. The next day,
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of course, the stock may have moved higher or lower. Assume for
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illustrative purposes, to compare apples to apples as it were, that the stock is
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trading at the same price—in this case, $76.
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If the trader is using the correct date in the model, the option value will
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adjust to take into account the effect of the dividend expiring, or reaching
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its ex-date, when the number of days to expiration left changes from 30 to
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29. The call trading postdividend will be worth more relative to the same
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stock price. If the dividend date the trader is using in the model is wrong,
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say one day later than it should be, the dividend will still be an input of the
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theoretical value. The calculated value will be too low. It will be wrong.
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Exhibit 8.1 compares the values of a 30-day call on the ex-date given the
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right and the wrong dividend.
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EXHIBIT 8.1 Comparison of 30-day call values |