If you are long an equity call option, will you receive a dividend paid to underlying shareholders?
No. In order to receive a dividend you must own shares. If the underlying stock is about to pay a dividend and you wish to receive the dividend you must first exercise the call and purchase shares on a timely basis. Generally, you must give instructions to your brokerage firm to exercise the call contract on the day before the ex-dividend date in order to be eligible for dividend payment. Consult with you brokerage firm on both the advisability and procedures for doing this.
If you are long an equity put option do you have to pay the dividend?
No. Owning a put conveys only the right to sell underlying shares at the strike price at any time before the put expires. This in no way obligates you to pay a dividend to anyone. On the other hand, if you have a short stock position in a stock that pays a dividend you generally do have to pay the dividend amount to whoever loaned you those shares.
If you have a covered call position are you eligible to receive a dividend?
As long as you still own the shares on the dividend's record date you will be eligible to receive a dividend paid to underlying shareholders. If you are assigned on the short call, your 100 underlying shares are called away, and you do not own shares on the ex-dividend date you will generally not be eligible to receive a dividend payment.
What is a contract adjustment?
Whenever the terms of an equity option contract have been changed to terms different from its original standardized terms, such as the contract's deliverable (unit of trade) after an underlying stock split, or corporate action such as a take-over, merger or special stock or cash distribution, those terms will be adjusted to account for this.
How can you tell if an option contract's terms have been adjusted?
- The option appears "mispriced" relative to the value of the underlying stock and the option's strike price - especially if all calls and puts in the class appear to be mispriced - and the price(s) appear "too good (or too bad) to be true."
- On an option chain you find two calls or puts with the same strike price but with different option symbols (e.g., XYZ vs. ZYX) and different premium amounts.
- If you suspect that a contract's terms have been adjusted then you should by all means attempt to verify this. Costly mistakes may result from trading an adjusted contract inadvertently.
Are contract adjustments standardized?
For underlying stock splits there are standard adjustments commonly made to strike prices and units of trade when necessary. For other types of underlying corporate action, such as mergers, take-overs, spin-offs, and special distributions of cash and/or stock, adjustments fit the circumstances and terms of each action, and these vary from situation to situation. If you have, or are contemplating an option position in any class of options that is undergoing contract adjustments, be on the alert. Make yourself fully aware of what the adjustments are and how they may affect you financially.
Are strike prices adjusted to account for regular cash dividends?
No adjustments to strike prices are made when an underlying stock pays an ordinary, regular (e.g., paid quarterly) cash dividend. On the ex-dividend date the underlying stock will open less the dividend amount, but by that point the marketplace will generally have adjusted the prices of calls and puts to account for this.
Can you use options in an IRA account?
In general, certain option strategies may typically be allowed. Brokerage firms have their own policies and limitations for option trading in IRA accounts so check with your own firm for specifics.
Happy Trading
Frank Kneipher
FKPRINTS1@YAHOO.COM
