Options on Dividend Stocks

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Options on Dividend Stocks

http://www.options-trading-education.com/24428/options-on-dividend-stocks/
In options trading one seeks profits
from changes in the price of the price
of the underlying stock and therefore
the value of the options contract.

Stock investors hold on to dividend
stocks because of the quarterly
income that dividend stocks provide.

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Before We Continue…

How does it work to trade options on
dividend stocks?

The Options Guide explains
the effect of dividends on option
pricing.

Cash dividends issued by stocks
have big impact on their option
prices.

This is because the underlying stock
price is expected to drop by the
dividend amount on the ex-dividend
date.

Meanwhile, options are valued
taking into account the projected
dividends receivable in the coming
weeks and months up to the option
expiration date.

Consequently, options of high cash
dividend stocks have lower
premium calls and higher premium
puts.

Options are usually priced with the
assumption that they are only
exercised on expiration date.

Since whoever owns the stock as of
the ex-dividend date receives the
cash dividend

sellers of call options on dividend
paying stocks are assumed to
receive the dividends and hence the
call options can get discounted by as
much as the dividend amount.

Put options gets more expensive due
to the fact that stock prices always
drop by the dividend amount after
ex-dividend date.

Aside from the short term effect of
dividends on the premium trading
options on dividend stocks is the
same as for non-dividend stocks.

Traders seek to anticipate price
movement and trade accordingly.

Do Dividends Add Extra
Value to Stocks?

Solid companies that have been
paying dividends for decades often
trade at a premium to similar
companies that do not pay
dividends.

This is partly because of the
perception of strength and value that
an unbroken string of dividend
payments for decades gives a stock.

However, that extra value is factored
into the stock price by the market
and does require an extra calculation
like the dividend does.

To the extent that investors might be
expecting a company to increase its
dividend payments this will factor
into the option price.

Multiple Option
Strategies and Dividend
Stocks

An old, but still useful options
trading strategy, is the long
straddle.

Options traders often use this
approach in volatile markets.

A long straddle is buying both a call
and a put on the same stock with the
same expiration date.

In a long straddle options strategy
the worst a trader can do is lose the
cost the premiums paid for the call
and the if the stock does not change
price.

However, this options trading
strategy has potentially unlimited
potential if the stock price changes
significantly.

When trading long straddle options
on dividend stocks the call option
may be discounted by as much as the
expected dividend payment and the
put option may be increased by the
same amount.

Hopefully this will result in the same
total premium payment.

If You Execute before the
Ex-Dividend Date

In trading options on dividend
stocks, if you execute the contract
before the ex-dividend date you will
be the one getting the dividend in
the case of a call and losing the
dividend in the case of a put

which is one for calculation to factor
in when trading options on dividend
stocks.

Options on Dividend Stocks

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Options on Dividend Stocks