I'm relatively new to options and am trying to understand the rules for adjusting for cash dividends. As best I can tell, prior to Feb 2009 the rule is best summarized by this excerpt from http://www.optionseducation.org/resources/literature/options_central/2004_summer.pdf "Q: I OWN AN OPTION ON A COMPANY THAT RECENTLY ANNOUNCED A ONE-TIME CASH DIVIDEND. HOW DOES THIS EVENT AFFECT MY OPTION? A: As a general rule, no adjustment is made for ordinary cash dividends or distributions. A cash dividend or distribution by most issuers will generally be considered ordinary unless, on declaration date, it exceeds 10% of the aggregate market value of the underlying security outstanding." The post Feb 2009 rule from http://www.optionsclearing.com/components/docs/market-data/infomemos/2010/sep/27648.pdf "... a cash dividend or distribution will be considered ordinary (regardless of size) if it is declared pursuant to a policy or practice of paying such dividends on a quarterly or other regular basis. Dividends paid outside such practice will be considered non-ordinary. OCC will normally adjust for non-ordinary dividends unless the amount is less than $12.50 per contract." Is this correct? The 10% rule would certainly have made bullish positions riskier. Would a regular yearly dividend be considered ordinary under the current rule? By specifying "quarterly or other regular basis" they seem to be implying that less frequent regular dividends will be treated as special dividends.
I am NOT a dividend expert by any means, but I think the options are adjusted, which then actually doesn't make bullish positions risker. I.E. if a stock is at $35 and you own a $35 strike call Now, there is a $5 one time dividend: The stock goes to $30 and the call is changed to a $30 strike - so the options remains at the money and will move up as the stock goes over $30, etc. I think this has happened fairly recently with OXPS and VRSN - you might want to check what happened in those examples. JJacksET4
Dividends don't change the value of an equity position. Under the current rule, 10% is the threshold for adjustment. It doesn't matter what the frequency is.
This is no longer true. Read my initial post. The rule changed in Feb 2009. If you need further evidence, an example can be found at http://www.optionsclearing.com/components/docs/market-data/infomemos/2011/jan/28241.pdf describing an adjustment for a $0.19 extraordinary cash dividend.
Sorry, my bad for the typo and the lack of details regarding the 10%. What I meant to say was that regarding your first link, under the former (not current) rule, 10% was the threshold for contract adjustment. Given that dividends don't change the value of the equity position, if the option is adjusted by the amount of the dividend, its value is unchanged. Well, almost. For example, if a stock is 20, you hold a 15 call (5 pts ITM) and there's a $3 spec div, after ex-div and adjustment, the strike is $12 and the stock is 17 and it's still $5 ITM. You could argue that there's a slight diminution in the time premium so there really is a loss but we're talking pennies. So inherently, a bullish position wasn't riskier for a 10% spec div.