Why the Ex-Date Matters You have likely heard of the term "ex-date" (or "ex-dividend date"). The ex-date is always one business day before the record date. If you buy the stock on or after the ex-date, you will not get the next dividend. Recall that it takes two days for a stock trade to settle, so the stock buyer who buys on the ex-date becomes the owner of record one day after the record date. Conversely, this means that if you sell the stock on or after its ex-date, you will be entitled to the next dividend even though you no longer hold the stock! Because buyers on a stock's ex-date will not be eligible for the next dividend, the stock price will adjust downward by the dividend amount. Many variables can affect a stock price, so in reality the stock price on the ex-date probably won't change in the exact same amount as the dividend. How This Relates to Options As mentioned earlier, on the ex-date, all things equal, the stock price will adjust downward for the future payment of the next dividend. Thus, if you are selling a call option on a stock that will have one or more ex-dates between now and the expiration date, you can expect the dividend(s) to help you. On the other hand, if you are selling a put option, in the same scenario you can expect the dividend(s) to hurt you. The market knows this and adjusts the option premium accordingly. A Real Life Example Consider the Verizon (NYSE: VZ) October 18 $60 call and put options. Even though both options are roughly at the money, as the small table shows, the put premium is much higher. This is because Verizon has an upcoming $0.615 dividend, and its ex-date is October 9 (the day this article is published). For no other reasons other than the dividend cutoff, VZ will fall by $0.615 on October 9. Therefore, call option buyers and put option sellers need to be compensated in the form of a lower call premium and higher put premium. Don't Be Fooled To adjust for the dividend, you should add $0.615 to the call premium and subtract $0.615 from the put premium. Otherwise you could be fooled into thinking the put premium is higher than it really is. The bottom line is that if you are considering selling options to boost income, don't forget to check out the stock's dividend schedule to get a better picture of whether you are getting a good deal or not. Looking for other ways to boost income? My colleague Jim Fink, chief investment strategist of Options for Income, has developed a "profit calendar" trading system that allows you to collect payments every Thursday, similar to a paycheck. These "paychecks" can range in value from $1,150 to $2,800, but average out to $1,692.50. Jim developed his strategy by studying the practices of Chicago pit traders and modifying them for use online. Jim built a personal fortune of over $5 million using his strategy. Now he wants to help you build your fortune. Click here to get started. |
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