36 lines
2.5 KiB
Plaintext
36 lines
2.5 KiB
Plaintext
252 Part Ill: Put Option Strategies
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Dividend payment dates may also have an effect on the frequency of assign
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ment. For call options, the writer might expect to receive an assignment on the day
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the stock goes ex-dividend. The holder of the call is able to collect the dividend by
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so exercising. Things are slightly different for the writer of puts. He might expect
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to receive an assignment on the day after the ex-dividend date of the underlying
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stock. Since the writer of the put is obligated to buy stock, it is unlikely that any
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one would put the stock to him until after the dividend has been paid. In any case,
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the writer of the put can use a relatively simple gauge to anticipate assignment near
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the ex-dividend date. If the time value premium of an in-the-money put is less than
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the amount of the dividend to be paid, the writer may often anticipate that he will
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be assigned immediately after the ex-dividend of the stock. An example will show
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why this is true.
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Example: XYZ is at 45 and it will pay a $.50 dividend. Furthermore, the XYZ July 50
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put is selling at 5¼. Note that the time value premium of the July 50 put is ¼ point
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- less than the amount of the dividend, which is ½ point. An arbitrageur could take
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the following actions:
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1. Buy XYZ at 45.
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2. Buy the July 50 put at 5¼.
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3. Collect the ½-point dividend (he must hold the stock until the ex-date to collect
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the dividend).
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4. Exercise his put to sell XYZ at 50 ( writer would receive assignment on the day
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after the ex-date).
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The arbitrageur makes 5 points on the stock trades, buying XYZ at 45 and selling it
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at 50 via exercise of the put. He also collects the ½-point dividend, making his total
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intake equal to 5½ points. He loses the 5¼ points that he paid for the put but still
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has a net profit of ¼ point. Thus, as the ex-dividend date of a stock approaches, the
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time value premium of all in-the-money puts on that stock will tend to equal or exceed
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the amount of the dividend payment.
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This is quite different from the call option. It was shown in Chapter 1 that the
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call writer only needs to observe whether the call was trading at or below parity,
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regardless of the amount of the dividend, as the ex-dividend date approaches. The
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put writer must determine if the time value premium of the put exceeds the amount
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of the dividend to be paid. If it does, there is a much smaller chance of assignment
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because of the dividend. In any case, the put writer can anticipate the assignment if
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he carefully monitors his position. |