How To Trade Options Around Dividends

If you trade options for any length of time you will run into stocks and ETF’s paying dividends. It’s important to know when these dividends will require you to adjust or close a trade.

What is a dividend?  “A dividend is the distribution of a portion of the company’s earnings, decided and managed by the company’s board of directors, and paid to a class of its shareholders.”

There are some simple guidelines that I follow when trading around dividends.

 

Long Options

If you are long an option or an options spread, you don’t need to worry about the dividend. The stock and options prices will be adjusted for the dividend. There is no need to close out of a position ahead of time.

I will hold my long options positions right through the dividend.

There is also no advantage of buying a put option in front of the dividend either. While the stock price will be adjusted lower by the price of the dividend, the option prices will be adjusted as well so there is no opportunity there.

 

Short Options

When selling options or options spreads it’s important to know the dividend dates as well as the amount of the dividend. We love to sell credit spreads as a staple of our trading.

However, when selling a call spread we need to be cautious around a dividend if the short call option goes in the money. If it does, the short option can potentially be assigned leaving you with a short stock position and you are on the hook for the dividend.

Here is a short cut to determine if you are likely to get assigned short stock going into a dividend:

  1. Check the bid price of the corresponding out-of-the-money put option. For example, if you are short the 50 call option then you would check the bid price of the 50 put option.
  2. If the bid price of the corresponding put option is higher than the expected dividend (see steps below for finding the dividend date and dividend amount) then you don’t have a high risk of being assigned stock.
  3. >If the bid price of the corresponding put option is lower than the expected dividend then you are at high risk of being assigned stock and you will want to close out of the position before the dividend.

 

How To Find Dividend Date For Options

To find the dividend date you can use a few different resources:

  1. If you use the Thinkorswim platform, you can click on the green icon next to the stock symbol on your watch list. This will show you the dividend date that is upcoming. dividend date and amount
  2. Go to https://www.dividend.com to use their Ex-Dividend calendar which will show you upcoming dividend dates along with the dividend amount.
  3. Use a simple Google search to look up the upcoming dividend dates and dividend amounts for the stocks/ETF’s you are trading.

Let’s take a look at a dividend example:

At the time of this article Apple (Symbol: AAPL) is set to release its quarterly dividend in 24 hours.

Using the Thinkorswim dividend tool we can see:

  • the dividend amount is going to be $.82.
  • Apple is currently trading for $303.74 per share.

For this example lets say you are short the 300/305 call spread. This means you are short the 300 call option that is $3.74 in the money.

With the dividend out tomorrow, should you be concerned with getting assigned stock?

If we use the steps outlined above and look at the bid price of the corresponding 300 put we can see its priced at $5.60.

Since this $5.60 bid price of the put option is higher than the $.82 dividend, you would have a very low chance of getting assigned stock.

As a result you can hold the position through dividend and not worry about it.

 

Conclusion

These are the guidelines I personally follow in my own options trading.

If you’d like to know more about how I trade options for a living, please reach out to me:

 

 

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