21 lines
1.4 KiB
Plaintext
21 lines
1.4 KiB
Plaintext
Dividend Size
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It’s not just the date but also the size of the dividend that matters. When
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companies change the amount of the dividend, options prices follow in step.
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In 2004, when Microsoft (MSFT) paid a special dividend of $3 per share,
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there were unexpected winners and losers in the Microsoft options. Traders
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who were long calls or short puts were adversely affected by this change in
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dividend policy. Traders with short calls or long puts benefited. With long-
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term options, even less anomalous changes in the size of the dividend can
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have dramatic effects on options values.
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Let’s study an example of how an unexpected rise in the quarterly
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dividend of a stock affects a long call position. Extremely Yellow Zebra
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Corp. (XYZ) has been paying a quarterly dividend of $0.10. After a steady
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rise in stock price to $61 per share, XYZ declares a dividend payment of
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$0.50. It is expected that the company will continue to pay $0.50 per
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quarter. A trader, James, owns the 528-day 60-strike calls, which were
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trading at 9.80 before the dividend increase was announced.
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Exhibit 8.2 compares the values of the long-term call using a $0.10
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quarterly dividend and using a $0.50 quarterly dividend.
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EXHIBIT 8.2 Effect of change in quarterly dividend on call value.
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This $0.40 dividend increase will have a big effect on James’s calls. With
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528 days until expiration, there will be six dividends involved. Because |