Are option prices linked to devidends

Discussion in 'Options' started by ricairns, Mar 21, 2011.

  1. ricairns


    I am fairly new to option trading, so this is probably a very silly question.
    If I were to buy 300 shares of ABC a few weeks before X-Devidend day. Then as the price of the stock runs up just before X devidend day I write 3 covered calls that are close to the money. Right after X Devidend day when the stock price adjusts downward, can I then close out my option postion and pocket the difference??
    Also, If I purchase a stock almost immediately after X Devidend day, am I liable for the taxes, if so how long before I am no longer liable?

    Finally can anyone suggest some trading stagegies that combine devidends and covered calls/puts?

    Thanks in advance

  2. MTE


    Dividends are priced into options so there is no free money to be made.
  3. There are no free lunches

    If it looks too good to be true, it is
  4. ptrjon


    I heard Ameri - prise gives free lunches.
  5. sle


    Well, not exactly true - there are a lot of hedgies that do div arb. You sell a lot of puts, delta-neutral and hope that there are some people who did not get the memo and forget to early ex.
  6. donnap


    Wouldn't that be ITM calls? There's still risk - not free money.
  7. sle


    Delta - neutral, not full delta. The actual risk is being short gamma.
    And you are right, deep ITM calls.
  8. sle


    Sorry, being dumb - it's been a while since I've looked at equity vol. You sell deep ITM calls vs delta, no need to trade anything else.
  9. FSU


    They way it is usually done is you would sell a deep in the money call spread. You would then exercise your long calls and have long stock. If all your short calls are assigned, you would have no position. For every short call that is not assigned, you would then have that short against your long stock and you would receive the dividend on your long stock. You would need to buy the corresponding put (to your short call) for it to be risk free (you would be long the conversion). For every short call that is not assigned, you are essentially selling the put for the price of the dividend less cost of carry.

    The risk is something happens overnight before you can cover your synthetically short put. You wont know how many you are short until you see how many calls weren't assigned.

    A twist to this is to both buy and sell the same call spread. You exercise each long call at the time you are long.
  10. sle


    yeah, my coworker just explained to me the whole process - he does a lot of these, apparently
    #10     Mar 22, 2011