Dividends impact option premiums. When a dividend is distributed the cash holdings of a corporation is decreased and therefore the company and its stock are worth less. The eligibility to receive the dividend depends on several factors including the size of the dividend. First, let’s define some terms:
Types of dividends
- Standard dividends: A distribution of a portion of a company’s earnings which can be issued as cash or shares of stock. Most dividends are distributed on a quarterly basis
- Special dividends: A one-time distribution of corporate earnings usually in the form of cash due to an exceptional amount of profit in a given time frame
Ex-dividend date standard rules
To capture a dividend a shareholder must buy the shares prior to the ex-dividend date (aka the ex-date). Under normal circumstances, the ex-date is two days prior to the record date which is the official date that the stock owner is, in fact, a shareholder of that company. Since it takes three days to settle a stock purchase, shares must be purchase three days before the record date. After that, two days before the record date, the stock goes ex-dividend and shares purchased from that point forward are no longer eligible to receive the dividend. The actual payment date is sometime after the record date. These standard rules apply to standard dividends and special one-time cash dividends which distribute less than 25% of the value of one share.
Ex-dividend date special rules
When the special cash dividend distribution is an amount greater than 25% of the value of one share the ex-date is set the day after the payment date. Therefore, if a stock is purchased after the record date but before the ex-date, the dividend is still captured. The ex-date always determines who receives the dividend, the stock buyer or seller.
Impact of special dividends on share value and strike prices: COSTCO example
In February, 2015 Costco (COST) distributed a special one-time cash dividend of $5.00 per share. Since this amount was less than 25% of share value, standard ex-dividend date rules applied. The record date was February 9th (after a weekend) and the ex-date was February 5th. Option strike prices were reduced by $5.00 per share on the ex-date and share value also declined because of this distribution as shown in the chart below:
Costco: Special dividend reducing share value
Summary
There are two types of dividends, standard and special one-time cash dividends. Special ex-dividend date rules apply when special dividends are greater than 25% of share value and it is always the ex-date that determines who receives the dividend. For option sellers, share value and strike prices will decline by the dividend amount on the ex-date.
Next live seminar
Market tone
US and International stocks rose broadly and with less volatility this week as Greece accepted the new austerity plan laid out by its creditors and China reported better-than-expected second-quarter GDP growth (7% growth). Early reports of 2nd quarter US corporate earnings surprised to the upside. This week’s economic reports:
- US housing starts rose 9.8% in June to an annualized rate of 1.17 million units
- Permits for future home construction increased 7.4% to 1.34 million units, close to an eight-year high
- The National Association of Home Builders/Wells Fargo sentiment gauge held in July at the highest level since November 2005. Low mortgage rates and labor market strength are strengthening increased housing sector activity
- US consumer prices rose 0.3% in June, a fifth straight month of increases, as gasoline and other goods increased in price. For the 12 months through June, the Consumer Price Index rose 0.1%, its first positive stat in 2015
- Initial jobless claims fell 15,000 to 281,000 for the week ended 11 July, the 19th straight week below 300,000
- Continuing claims dropped significantly by 112,000 to 2.22 million for the week ended 4 July
For the week, the S&P 500 rose by 2.41% for a year-to-date return of 3.29%.
Summary
IBD: Confirmed uptrend
GMI: 6/6- Buy signal since market close of July 14, 2015
BCI: Moderately bullish favoring out-of-the-money strikes 2-to-1 and so far encouraged by early corporate earnings.
Wishing you the best in investing,
Alan ([email protected])
Premium Members,
This week’s Weekly Stock Screen And Watch List has been uploaded to The Blue Collar Investor premium member site and is available for download in the “Reports” section. Look for the report dated 07/17/15.
Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them at The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:
http://www.youtube.com/user/BlueCollarInvestor
Since we are in Earnings Season, be sure to read Alan’s article,
“Constructing Your Covered Call Portfolio During Earnings Season”. You can access it at:
https://www.thebluecollarinvestor.com/constructing-your-covered-call-portfolio-during-earnings-season/
Best,
Barry and The BCI Team
You do 1 month covered calls and buy back to close the contract if the price of the stock falls then resell the covered call if it goes up. I usually do 3 to 6 months Covered call depending on the stock. If it’s a dividend paying stock and it’s in the money I pay attention to the ex-date of the stock, Usually that person that exercises my option and takes the stock to receive the dividend ( when the stock is in the money ) will sell the covered call and make more money. Do you act on buying the covered call to close the contract if it’s a dividend paying stock and it’s in the money?
Thanks,
Jim
Jim,
I use 1-month time frames for 3 main reasons:
1- Re-evaluate my positions on a more frequent basis
2- I never write a call if there is an earnings report due out prior to contract expiration. Two months is the most I will own a stock for cc writing. I may return again after the report.
3- Higher annualized returns
Dividends:
I do not care if my shares are sold prior to the ex-date. That simply means that I have maxed my return and now have the cash back early to re-invest. If I did care I would:
1- Sell the call the day after the ex-date or
2- Write a 2-month option so the ex-date is well before contract expiration.
Alan
Premium Members,
The Weekly Report has been revised and uploaded to the Premium Member site. There was a typo with EBAY that caused it to appear in the wrong place in the report. That has now been corrected with the revised report. Please look for the report dated 07/17/15-RevA
Thank you Emily…
Best,
Barry And The BCI Team
Hi Alan,
I’m a new premium member and currently reading three of your books. I’m trying to hone my stock selection skills by using your great Elite calulator. I’ve been using the calc over the week-end and noticed the BID/ASK spread was quite wide {unrealistly wide)! So my question is; When is the best time to do the analysis for the stocks I’ll be selecting? Does all of the analysis take place when the market is open? I might,also, add that you have put together one hell-of-a system, thanks.
Ron
Ron,
90% of the analysis can be accomplished in evenings and on weekends if you work during the day. Actual buying and selling with final calculations must be done during market hours and I prefer trading between 11 AM and 3 PM ET to avoid the potentially volatile computerized institutional trading that takes place early and late during trading hours.
Bid-ask spreads can be wide on weekends especially after an expiration Friday. They will tighten mid Monday morning especially for the more liquid options.
Thanks you for your generous comments.
Alan
Alan,
I’m new at all this, and I just subscribed and received my first Premium Member Weekly Report.
It looks like there are only 5 stocks that meet BCI criteria and that don’t have ER prior to August 21st. Am I reading this correctly?
Also, my discount broker seems to be having trouble getting option chains on ebay stock today. Anybody else having that problem?
One last thing (for now!), the “open interest on PVTB is fairly non-existent at the moment. Is that because this s a 5-week contract period and/or a “less” popular stock?
Thanks,
Frank
Hi Frank,
We are in the heart of earnings seaason this week so the number of eligible candidates is reduced. Currently, there are 9 eligible candidates on our “running list” (BRLI through MBFI) in the white cells. Note that PVTB has an “N” in the open interest column meaning that at the time the report was constructed there was NOT adequate option liquidity. Also, there are another 14 stocks that are repoting this week and will become eligible once these reports pass (gold rows on top). Also, there are severat ETFs for consideration.
Paypal spun off from EBAY today so I would anticipte option information to be available by tomorrow.
Alan
Alan,
There are several stocks in your current premium list that in the Failed Current week Section, such as BLOX, GIII, OXRK, UNH and WBA. I do not see why they failed this week. Can you explain why they failed?
Thank you,
Steve
Hello Steve,
Per your question, why these stocks failed…
BLOX – Failed Moving Averages screen (price bar/candle was
below the 20 day EMA)
GIII – Failed the Technical Indicators screen (both MACD and
Slow Stochastics failed)
OZRK – Failed SmartSelect, Failed Moving Averages screen
(price bar/candle was below the 20 day EMA),
Failed the Technical Indicators screen (both MACD
and Slow Stochastics failed)
UNH – Failed SmartSelect screen
WBA – Failed the Risk/Reward (StockScouter rank was 4)
I hope this helps you better understaand the BCI methodology.
Best,
Barry
Hi Barry,
Thank you for the reply. I now see OZRK and WBA in pages 2 through 4 of the report, which give me the info you provided, but I do not see BLOX, GIII or UNH in those pages.
In the past I have not looked at this section, but since there were so few stocks that passed your screens that did not have an ER this month, and these 5 stocks did not have an ER this month, so I was wondering why they failed your screens.
Thank you,
Steve
Steve,
Each week, I rescreen every stock in the previous week’s report as well as the new IBD 50 list and the “Other” list (these are in the first section). There are a number of stocks that may not be on the new IBD 50 ot “Other” list but are on the “Running List”. These are rescreened every week and stay on the “Running List” until they fail for three (3) consecutive weeks, at which time they are placed on the “Removed From Running List This Week” section.
So…the reason that you don’t see BLOX, GIII, or UNH is that they were on the “Running List” but not in the first section.
Best,
Barry
My seminar last night in Saddle Brook New Jersey:
Thanks for your gracious feedback and filling the room to capacity…it doesn’t get any better for a speaker…
CLICK ON IMAGE TO BENLARGE & USE THE BACK ARROW TIO RETURN TO BLOG…Alan
Alan,
One of the possibilities in covered call writing is that the stock goes beyond your call and it is called away. You teach that you give up potential profit here. Consider VRX.
I bought 100 shares on 5/26 at 234.60. I then sold a 240 Jun15 call at 4.50. On 6/17 I rolled it to a Jul4 240 call for .20 credit, since little had happened in the price. On 7/8 I closed it at 2.35 for 1.90 net credit and on 7/9 sold a Jul5 235 call for 4.5. This is only 40 cents above my entry, and the stock is no at 240.25 ($5.25 above the strike). In theory I would have given up $5 of appreciation in the stock, but the $4.50 of premium cuts that to only 50 cents. Since I also booked 2:10 of profit in the past on this position, I have made $1.60 MORE than simply holding the stock. This could change slightly in that I have 10 days left on the option, but it’s still a great illustration of how a covered call can give you good profit.
I’m sure you have other examples, but here’s one from a student that you can use in one of your seminars.
Ted
Hi alan it’s been a while since I was here as I’ve been sorting out trades and other things, so will hope to be about a bit more regularly.
Here are 4 questions on the trade entries:-
1. You have told me once that you base your strike more ITM or OTM depending on how bullish/bearish you are, but are you using like a percentage (or maybe going up/down by 0.50c, $1, etc) for every little concern/optimism you may have based on the usual market-tone, stock technicals, beta, or how far during the contract we are in, etc?
What I mean here is, say the market is concerning so would you may find a price like 1% ITM, next you see stock technicals look mixed(maybe channelling) so you decide another 1% ITM, beta for the stock is high so say 1% ITM again, and if that’s not enough as it’s halfway through the contract strike goes 1% ITM again. Is this the method you use or I could implement myself for finding the most appropriate strike?, and if so does 1% sound too much/ enough?
2. If the price at expiry is above(or at) the EMA’s, but both the Slow Stochastics and MACD are negative then should I view the stock as mixed or negative?
3. If a stock you want to use has rallied up quite alot, and is at a Resistance level with indicators looking Overbought, then would you wait for a pullback in price first before buying it,- or just use straight away?
4. And if price of my stock falls to a support level area and then as it happens it rises back up in the last week, to 1 week and a half,- then what is the best strategy to use? (I am thinking possibly a “take no action” throughout each week would have been best) / (too late for hit a double, and the rolldown strike is at around the support level too.)
And that is just what happened to my trade in ‘TASR’, I rolled- down and then the price finally rose back up, and if only I knew! Thank you
Adrian,
My responses:
1- I have a user-friendly way to select my strike prices. I first determine the “moneyness” of the option…ITM or OTM based on my overall market assessment, chart technicals and personal risk tolerance (I consider myself a conservative investor). Next I set my monthly goals for initial returns (2-4% in my case). If chart technicals are mixed and market conditions are of concern, I will look at ITM strikes that generate 2-4% of time value. The more concern I have, the closer to 2% I go. If I’m bullish with all positive chart technicals, I will look at OTM strikes and move as far OTM as possible while still meeting my monthly goal…simple.
2- Mixed
3- Straight away…I love stocks that are trending higher with all bullish and confirming technicals. Overall market assessment may still lead to using ITM strikes as I did during the crisis in Greece.
4- In this scenario, I will adhere to the 20/10% guidelines as to when to buy back an option. I am quite structured and rarely veer from the strategy I share with our BCI community.
Alan
Running list stocks in the news: AAN:
Aaron’s is a retailer of furniture and consumer electronics with 2100 stores in the 48 states and Canada. With unemployment dropping and new home purchases on the rise, this company may be primed for a significant share increase. AAN has beat market consensus in 5 of the last 6 earnings report with one “meet” It is due to report on July 24th.
From a fundamental perspective AAN is trading at a “discount to industry” with its forward PE, price-to-book and price-to-sales all well below industry average.
Our Premium Watch List shows AAN to be in the “Retail” industry currently ranked “A”, a beta of 0.79, a % dividend yield of 0.20 and the previous ex-date of 6/20/2015. Currently the only strike price with adequate open interest is the $38.00 strike so please be careful about liquidity issues should you decide to use this security after the report passes.
Alan
Dear Alan and Barry,
Thought I would stop by and say hello!
I was at a social occasion over the weekend. All the guys ended up in a corner talking sports and money over a few beers 🙂
Many of our contributors here profess to be new. I am not. I have been doing this a long time and have the scars to prove it :).
But to everyone here both new and battle tested I extend warm greetings and welcome!
I retired a couple years ago. I was daunted at the task of creating replacement income. I am too young for Social Security 🙂
Then along comes Alan…..
Every retiree should be selling options in their tax sheltered accounts. Working people should do the same thing. Just don’t sell them in taxable accounts. The toll is too high.
In the corner over beers I told the guys I make a couple % each month. Anyone remember the old E.F. Hutton commercials,,,,,,,,, :)?- Jay
Haha Jay, I just watched an old E.F.Hutton commercial. Looks like we may have a few more members joining shortly. 🙂
Thanks Nate, this is a great blog and board to learn from each other and Alan about selling options. And sometimes just share a laugh! All the best to you. – Jay
Hey Jay,
I’ve been paper trading your weekly SPX short strangle. So far is been pretty successful. On the rare occasion that it breaks R2 or S2 how to you handle that?
Thanks, Nate
Hey Nate,
What I do most weeks for income is sell a “Condor” meaning I sell a call spread just outside R2 and a put spread just outside S2 on SPX. I of course also sell monthly calls as far out of the money as i can to still get 1% per month yield on all my stocks. But lately with the VIX so low I do not even do that since you have to snuggle up so close to price.
The spread selling game is a lot of fun and it is always great to make income using house money 🙂 But to answer your question let me use a real example for tomorrow and be fully disclosed:.
i sold 30 contracts on the SPX 2100/2095 put spread for tomorrow. The SPX closed at 2102. I normally buy back a spread like that when it gets close and eat my loss. But I like 2100 as support so I am a brave man standing in the wind.
Or a fool standing in the rain.
If we go lower tomorrow my goose is cooked and I will be looking at exit strategies to cut loses. If we close above 2100 I keep the income.
I do not have much risked and I sold a lot more call spreads on the top side figuring the usual summer correction had to be near. Those will all expire worthless.
The point is just get out there and sell options. Yes VIX is low and yes we are prime for a correction, But who knows 🙂 – Jay
Jay,
Thanks for helping to spread the word….Alan
Alan,
Always glad to help in any small way I can. Thank you for teaching us and making all this possible! – Jay
Jay,
Thanks for laying out your strategy. I understand now. Too bad it was a rainy day today for you. I was wondering why the spread at each end but after studying a bit I can see much lower risk than selling naked. I like the idea. I’ll practice this. Thanks again!
Nate
Premium members:
This week’s 6-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists Top-performing ETFs with Weekly options.
Financials, Homebuilders and Consumer Discretionaries are in the spotlight this week
For your convenience, here is the link to login to the premium site:
https://www.thebluecollarinvestor.com/member/login.php
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Alan and the BCI team
Alan,
Is there any way to predict intelligently the result of upcoming earning report?
Keith
Keith,
None that I know of with one minor caveat. Some companies historically downplay guidance in hopes of beating consensus. Years ago, AAPL and CSCO would consistently “beat” because of this but analysts are now factoring that into projections. Over the past several years there have been more positive than negative surprises but playing earnings reports is risky business and only for investors with high risk tolerance.
Alan