Selling stock options the day before ex dividend date?
I was thinking that you could buy an ITM stock option and let it go up until three dates before record date (one day before ex dividend), and then sell it. Because on the next day (the ex dividend date), it will go down. And I could either take those profits and run, or buy it back on the ex dividend date.
Is that a strategy that works? Do people do this?
Keep in mind I'm talking about stock OPTIONS.
- cactusgeneLv 78 years agoFavorite Answer
You would not be making a profit by selling just before the ex-dividend date, because while the stock usually does decline by the amount of the dividend, the holder of record will get that amount back from the company in the form of a dividend check.
Edit: OK, based on your additional comments I see what you are driving at. However, this still would not work, because the difference in the spread (difference between the option bid and ask price, which is much larger on options than on the stock) plus the commissions you pay for both trades (even on an online discount broker's site) is probably much greater than the dividend paid out, so you would still end up with a loss. Then, most MM price their options based on the Black Shoales model which takes into account any dividends paid. On top of all that close to half the time the price move of the underlying stock goes in the opposite direction of where you expected it to go, dragging the options price along in tandem and this magnifies the loss. So no matter what you do, you don't end up with the cherries but only the pits.
But you know what? We live in a free country and you can do just about anything you want. You test your theory on 5 trades and if you lose on four of them you will probably be cured of your desire to do it again. But I wish you good luck.
- Anonymous3 years ago
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- InspectorBudgetLv 78 years ago
There is no guarantee that a stock will go down by the dividend amount on x-div day.
On rare occasions, it goes up more than the amount of the dividend.
As example, look at the stock TPZ. On Friday it was x-div to the tune of 12 cents. The stock opened at $25.70, which was exactly the previous day's opening less the dividend, then quickly recovered - and ended the day at $25.94.
If you had shorted the stock ( no options on this one ) hoping to cover on Friday, you would have lost your shirt, and then some. And you will also be on the hook for the dividend payment to whoever bought your shorted shares.
- MelissaLv 44 years ago
a) You expect the stock price to drop by the $0.61 b) You do not expect anything to happen to the option price because of the dividend payment as the dividend payment was known and expected as part of the option price (there's a tiny caveat in this about early exercise). c) You finally have $2.25/share in cash, a tax bill, and have given away any upside on your stock while you keep all the downside. If JNJ drops to $52 you will really wish you didn't do this trade.
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- 8 years ago
No. You seem to have totally ignored the fact that if you pay more for the stock and sell it for less.the div means nothing. Why would you lose $100 for $10 div. If $1 div on a share was paid on a $500 stock times 100 in an option is only $100 for $50,000 worth of shares. So if the stock goes down to $498, for you to get out and run, you would need to pay $200. No one who buys options do it for div. Your strategy would never work in reality. Some where you would lose over those div payments. The greed of div would get you because you would wait for calender dates to trade stocks. instead of when the option is in the money.
- 8 years ago
you are trying to beat the market and all it requires is acurate judgement about price i.e. premium you pay for buying option.
Because what you are thinking if others also had think previously in same manner then market will
sense such over demand in such stock and will result in rising price for that stock
As, becuse of this behaviour you can see lot of volatility in stocks after announcement of corporate actions
- RaysorLv 78 years ago
If it did work then people would do it and then....it wouldn't work!