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SPY Ex-Dividend Date is Friday

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September 19, 2007 – Comments (6)

For anyone long in-the-money September SPY calls, remember that the ex-dividend date is Friday. This means that you must take action tomorrow, which is Thursday. Call option values will decline on the ex-dividend date because a 60 cent per share dividend is being paid, which will cause SPY to decline by the amount of the dividend. Holding the call into Friday without taking action is a mistake.

Consequently, you need to either sell your long SPY call or exercise it. Which one? Well, exercising will get you the 60 cent dividend, but the SPY stock you buy will immediately decline by 60 cents so exercising doesn't really gain you anything. Basically, you should sell the call if the bid price of the option has any extrinsic (i.e., time) value. For example, say you are long the Sep. 152 call, trading at 1.57. The SPY is currently trading at 153.12, so the intrinsic value is 1.12 (153.12-152) and the extrinsic value is 45 cents (1.57-1.12). Since there is extrinsic value, you should sell the call. If the bid price of the option is below intrinsic value, then you should exercise the call, collect the dividend, and sell the exercised stock to capture intrinsic value.

Jim

 

6 Comments – Post Your Own

#1) On September 19, 2007 at 6:18 PM, TMFHelical (98.72) wrote:

No, it was last Friday.  I noticed it reflected in a pick I opened then.

http://boards.fool.com/Message.asp?mid=25904502

 Zz

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#2) On September 19, 2007 at 6:21 PM, TMFEldrehad (99.99) wrote:

I've never traded options in my life, but what you write here has me scratching my head.

Call option values will decline on the ex-dividend date because a 60 cent per share dividend is being paid, which will cause SPY to decline by the amount of the dividend. Holding the call into Friday without taking action is a mistake.

Doesn't the options market anticipate the underlying capital asset (stock or ETF) going ex-div and price accordingly well before the actual ex-div date?  If not, and you are looking to sell your options before the ex-div date, aren't the buyers in the options market aware of the same thing?  And if so, why would they be willing to buy your option when they know the underlying asset is about to go ex-div and they'll be the ones left holding the proverbial bag?

Again, I'm not an options investor and probably never will be, but I'm having trouble wrapping my mind around how/why this works.

Regards,

Russell (TMFEldrehad)

 

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#3) On September 19, 2007 at 6:26 PM, XMFHamp (99.88) wrote:

Hi Ralph,

Please see the following link, which expressly states that the ex-dividend date is September 21st (this Friday):

http://www.amex.com/?href=/etf/prodInf/EtPiDistributn.jsp?Product_Symbol=SPY

 

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#4) On September 19, 2007 at 6:39 PM, TMFHelical (98.72) wrote:

Jim,

Yup, you're right.  Thanks.

Zz

I still wonder if CAPS made the adjustment already, but it doesn't much matter really - CAPS isn't reality.

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#5) On September 19, 2007 at 8:28 PM, XMFHamp (99.88) wrote:

The call option value does not anticipate the underlying asset going ex-dividend because to do so would create an arbitrage opportunity. Let's take the Sep. SPY 152 call. If SPY is trading at 153, near expiration the call will be worth $1. If the call anticipated the 60 cent dividend and traded at 40 cents, one could buy the call for 40 cents, short the stock at 153, and then exercise the call and buy the stock at 152, locking in the 60 cent dividend as an arbitrage profit.

The buyers of the call are obviously aware of the ex-dividend, but they can always exercise the call, thereby collecting the dividend and at least breaking even. Almost every in-the-money call will be exercised prior to Friday because extrinisic value is virtually nil and there is a 60 cent dividend. Why would someone want to buy a call only to exercise it almost immediately? Well, for highly sophisticated traders there is sometimes an arbitrage opportunity between calls and synthetic calls (i.e., long put plus long stock). If the dividend captured via buying the stock is greater than the interest incurred in buying the stock plus the cost of buying the put, the trader will exercise the call.

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#6) On September 19, 2007 at 10:38 PM, TMFEldrehad (99.99) wrote:

That explains it, thanks!

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