Anthologic
Amicus
"Lord of all Reality"
Ha!
Posts: 1,237
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Post by Anthologic on Feb 13, 2008 0:07:01 GMT -5
How?? Seriously. linkThat news article describes what the market movers are doing with Feb $75 option calls for Exelon Corp. I don't quite understand how they are making money by buying those calls and exercising them for the $0.50 dividends, and why they are hoping the other player won't exercise them (because I thought only the one who buys the option can exercise them, how can the seller do that?). AAdmin can you shed some light on the strategy of a dividend play?
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Post by Emperor AAdmin on Feb 13, 2008 13:35:08 GMT -5
I honestly would not be that knowledgeable about this particular option play but I will post some related post to it. linkDIVIDEND INVESTOR -- by Eric Aafedt Perfect for your IRA! Our Dividend Investor service focuses solely on the "best of the best" dividend paying stocks. Many of the stocks that we will be buying in our Dividend Investor service raise their dividends almost every year. Year after year! This is powerful. We buy these stocks for their powerful dividend producing income; and we will also buy these with a purpose to make capital gains as the stock increases in value.
Chart by StockCharts.com
EMR (Emerson Electric Co.)
There is a lot of opportunities in quality dividend-paying stocks. We currently like Emerson Electric (Ticker: EMR) at its Friday closing price.
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Post by Emperor AAdmin on Feb 13, 2008 13:37:23 GMT -5
Capturing dividend using options
A Special Correspondent
OPTIONS can be used for multiple purposes. One common usage is for capturing directional movements. Depending on the investor's expectations of the movement of the underlying stock, positions are taken in the options market.
Another usage of options is for earning returns, which are relatively risk-free. This can be done by either writing deep-in-the-money covered call options. Another is to capture dividends, which will be paid in the near future.
** This dividend play is relatively risk-free as for as returns are concerned but there is also some uncertainty associated with it.
**The uncertainty arises because the return depends on the action of the counter party to the position taken in the options market.
** This strategy is executed by buying the underlying stock and simultaneously selling a deep-in-the-money call option.
** Before the execution of this strategy, it should be noted that the underlying stock has declared dividend and the transactions are completed just prior to the ex-dividend date.
** By doing this, the investor will be able to capture the dividend with minimal risk.
For example, consider Reliance Industries, which has just declared dividend of 50 per cent, that is Rs 5 per share. The strategy involves buying Reliance shares from the cash market at Rs 275 per share and simultaneously selling a deep-in-the-money call.
The best in-the-money (ITM) call available in the market is 260-strike call. Deeper the strike price, the lesser is the time value component comprising the call premium. A 240 or 220 call will have option premium closer to the intrinsic value than a 260 call.
Currently the 260 May Call is quoting at Rs.17. If Reliance stock goes ex-dividend in the month of May, then the investor can try the dividend play strategy.
The investor should buy the stock and sell the 260 call for a net debit of Rs 258 (275-17). On the ex-dividend date, the stock price will fall by Rs 5 to Rs 270. The Option price also will fall by the dividend amount to Rs 12. The decline in the price of the underlying and the option will be close to the dividend amount as deep-in-the-money calls normally have deltas closer to one.
A delta closer to one indicates that a rupee change in the underlying will lead to a rupee change in the option premium also.
In the above instance, a call with a strike price of 220 will have a delta of 0.99 while that with a strike price of 240 will have a delta of 0.94 and 260 have 0.76
Hence, after the stock goes ex-dividend, the investor can sell the stock and incur a loss of Rs 5. By squaring off the call open position - buying the same call, the investor will gain Rs 5, (Rs.3.8 when the strike price is 260) which will offset the loss incurred in the cash market.
However, since the investor was holding the share on the ex-dividend date, he will be getting the dividend amount of Rs 5. The net gain to the investor is the dividend amount.
The risk of this strategy is that the call may be assigned to the writer before the stock goes ex-dividend.
In such a scenario, the investor will be forced to sell the Reliance stock at Rs 260, leading to a net gain of Rs 2. The original investment is Rs 275 while it is sold back at Rs 260, thereby incurring a loss of Rs 15 per share. By writing the option, the investor would have received Rs 17 per share. Thus, the net gain is only Rs 2 per share.
The investor should take into account the transaction costs while following this strategy. The costs can be quite high, since there are two transactions in the first leg and two more in the second leg, the overall return can come down significantly due to these costs.
link
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Anthologic
Amicus
"Lord of all Reality"
Ha!
Posts: 1,237
|
Post by Anthologic on Feb 14, 2008 20:22:12 GMT -5
I don't know if either of you checked out optionmonster yet, I highly recommend it, it's awesome. Especially their afternoon tea webcasts.
Anyway, one of the things I learned from the website on dividend plays in case either of you knew;
when a dividend is announced the value of the dividend is added onto every in-the-money option! The specific example they used was the $1.5 dividend in November from McDonalds. Since it was in the middle of the month that it was dished out, after the 15th every ITM option had $1.5 drained out of it because of the dividend.
Something to keep in mind when trying to convert that into money.
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