dividends vs china

Discussion in 'Options' started by Baozi, Dec 2, 2019.

  1. Baozi


    hey guys,

    so, today was actually the first time I went through a dividend while holding options. I trade a chinese etf which pays a dividend once per year (european style), and today was the ex-dividend date.

    So far my knowledge of dividends had been purely theoretical (I started trading options last february), and it was my understanding that the dividend should have been already priced in, with the puts becoming increasingly more expensive, and after the dividend ATM puts and calls should have gone back in sync.

    Today instead I found out that something different had happened: all the options I was holding didn't move a penny, they simply got their strike lowered by the dividend amount.

    So, for instance, I was holding a call with strike 2.90, now that strike has become 2.86, option value and related P&L totally unchanged.

    Then I saw that all the options on the exchange got duplicated: there is now a set of post-dividend options all trading at funny decimal strikes, and a fresh new set of options with same maturities but trading at the original pre-dividend round strikes.

    So my question is... Is this normal or is it yet another example of "options with chinese characteristics"???

    Under these circumstances, I think that should adjust my models inputting dividend=0 on every formula where dividends appear, do you agree with me?
    Last edited: Dec 2, 2019
  2. Wheezooo


    1- No, not normal, but they are options, you can structure them any which way you want and then some, so normal is relative. It's as if they took out the need for an early exercise decision by the strike shift, but that has to do some super weird shit to the ATM stuff. A 2.86c vs 2.86 ain't gunna be worth the same as a 2.9c vs 2.9... It's quite interesting though. I generally will avoid any convo on early exercise, but this is neat and kinda peaks my interest a bit.

    2- If I ask to see the contract specs, are they only in Chinese? Or worse yet, those Chinese products that come with poorly translated English instructions. :D
    Last edited: Dec 2, 2019
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  3. Baozi


    hehe if you really want, I could help you do some translation work.. in exchange for a few pro tips, of course :sneaky:

    however, for now, my main question is: how do I adjust my models for that? Just set dividends to zero in all formulas as they seem to have no influence on the outcome?
  4. Wheezooo


    Did they adjust the strikes of the future months as well?

    ...and have to ask... If you exercise a 2.00 call, do you get 2's or the adjusted 1.90's - I'm assuming 2's.
  5. Baozi


    yep, full adjustment/duplication across all strikes and expirations.

    let's say there were 3 expirations before, 30-60-90 DTE each with strikes 2.8/2.9/3.0/3.1, and then that the dividend was 0.02. All options would then be transformed into 2.78/2.88/2.98/3.08, across all tenors. premium before and premium after totally unchanged as the strike dropped by the same amount of the underlying. you were holding the 2.9 puts at 60DTE, now you are holding the 2.89 puts at 60DTE P&L unchanged.

    At the same time, there would be a new entire chain of options popping up at the original strikes 2.8/2.9/3.0/3.1, and I bet that those would be the contracts that you should be actually holding if you were in a normal country...
  6. Wheezooo


    Then, you need to take the dividend out.
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  7. Baozi