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It's "the rules" against "I have seen" for these extraordinary events, isn't it?
Whole bunch of strawman experiential guides and determinations like "10%" of the value of the stock" triggers a "special meeting to decide" stock option price changes, (huh?) and any option sold against shares which is less than the total value of the dividend makes the shares subject to call, in which the folks who call away the stock are shooting for the dividend yield to be in excess of the time premium, minus the change in value the day the stock goes ex dividend (but only on alternate periods when there is a full moon and the tanna leaves are in bloom Universally)(sarcasm).
Current guestimates are written by folks who mix apples and oranges--big surprise dividends with magic ceilings and floors. My guesses are as good as anyone else's, and the site you're reading is filled with more "I done seen" than "written in stone".
There PROBABLY will be an adjustment to share option prices, but $4.50 does not exceed the legend/rule of thumb that there is something magic about 10% of the stock price triggering put or option strike price restructuring.
So where are we?
prior to ex date 5 Dec a whole bunch of folks won't have the div vrs ex div issue straight and be buying all the way to COB 6 December, and asking that question about a zillion times on this board, having done no research on the issue beforehand to include the simple googling of this board's positions.
a whole bunch of folks will want to dump ex div for any price in excess of $49 since the runup subsequent the announcement has already exceeded the divvy, a whole bunch of shorts will be scrambling to catch that lower number, and that number may not last more than five seconds.
and another whole bunch of folks won't understand the $4.50 decrease ex div day and will sell, the other group thinking the stock is on sale for any number of reasons and these two groups will be battling all day.
the stock will continue to have positive pressure in spite of that prior to ex divvy because folks are just getting the word, and the volume, is reflecting the divvy, but the stock remains under the radar (hard to believe),
the (retail) shorts are having a nervous breakdown because of the warranted or unwarranted runup (take your pick), the shares are still $6 shy of all time high, yet maintain a PE of 17-18 which is average, the company is running 6 days a week 365 (and really should hire more atheists and folks who celebrate the Sabbath on Saturday to handle Sunday workload) -- and more increases to productivity are due next year.
I could go on for hours. As usual, in attempts to be "fair" to option holders, the system is "unfair" to option writers if the option prices are adjusted downward.
Puts are supposed to go up when the stock takes a plunge, and options are supposed to go down when stocks take a plunge for any reason. But I have watched the market during some particularly heavy dividend related selloffs and NOBODY trades till the stock shows a trend. Option buyers don't generally even set a price till the market shows direction, and frankly I have seen folks wait to buy or sell a covered call for an HOUR after market opens and the first sale HOURS thereafter, up down or sideways.
We'll just have to wait and see. What I think will happen has too many variables--I do know this--if you've sold a covered call with a time premium lower than the dividend, whatever the market forces are, your platform, ETRADE/SCOTTRADE will probably look very hard at exercising that option early and taking the arbitrage position difference. You own at $50, you sold a call against your shares, say at $50 for anything less than $7.50, with the stock at say $53.01, giving you a time premium less than the dividend amount, you have a high probability of being called away, even if the strike month is July or January 2014 or whatever. Your platform has instant arbitrage capability and is capable of doing that ANY time after you have written a covered call against your shares.
Turns simple investing into a #$%$ #$%$ fight, doesn't it?
DATE: SEPTEMBER 2, 2010
SUBJECT: CHANGES TO CASH DIVIDEND ADJUSTMENT POLICIES –
GUIDELINES – ADDITIONAL INFORMATION
OCC Information Memo 27649 describes additional changes to the policy that will govern adjustments to options in response to cash dividends or distributions. These additional changes will become effective on February 1, 2012 and concern the authority of the Securities Committee to stop adjusting for certain cash dividends which had previously occasioned adjustments. This Information Memo incorporates a discussion of this recent policy change. (See the “FAQ” section of this Memo.)
OCC has been asked questions about how the adjustment policy for cash dividends or distributions will be administered and to provide examples of how the new adjustment approach might be applied to actual or hypothetical situations. The purpose of this Memo is to respond to some of these questions. A review of the adjustment policy is presented below, followed by a number of “FAQ’s”.
The Definition of “Ordinary” Cash Dividends – The “New Method”
Under the changes to the OCC By-Laws which became effective in February 2009, a cash dividend or distribution will be considered ordinary (regardless of size) if it is declared pursuant to a policy or practice of paying such dividends on a quarterly or other regular basis. Dividends paid outside such practice will be considered non-ordinary. OCC will normally adjust for non-ordinary dividends unless the amount is less than $12.50 per contract. The determination of whether a given cash dividend is “ordinary” according to this definition will be made by adjustment panels of the OCC Securities Committee. (These adjustment panels are convened for the purpose of determining the appropriate contract adjustment under the OCC By-Laws in response to corporate events. They are composed of two representatives of each exchange that trades the affected option and a representative of OCC who votes only in the event of a tie. The adjustment panels consider each corporate event on a case by case basis.)
II. Frequently Asked Questions
Disclaimer: The OCC Securities Committee has reviewed the questions and answers presented below and believes they provide useful guidelines for how the new adjustment policy will be applied in practice. However, as indicated several times below, all adjustments are individually determined by an adjustment panel of the Securities Committee on a case by case basis, and adjustment panels may make exceptions to general rules, interpretations, and policies in cases where they determine such exceptions to be appropriate. In no instance are the examples provided below meant to determine in advance the decisions that any adjustment panel will make in the future.
Overview of the New Adjustment Policy
Q. Who decides if an option adjustment shall be made?
A. All adjustments are determined on a case by case basis by an adjustment panel of the OCC Securities Committee. Each adjustment panel is comprised of two representatives from each exchange that trades the option in question, plus an OCC representative. The OCC member only casts a vote to break a tie. The adjustment panel decides whether an adjustment is called for and how it should be done.
Q. What cash dividends call for an adjustment?
A. “Ordinary” cash dividends do not call for adjustments. An “ordinary” cash dividend is defined as one paid “pursuant to a policy or practice of paying such dividend on a quarterly or other regular basis”. A cash dividend which is considered to be outside this regular policy is non-ordinary. Assuming a given dividend is non-ordinary according to this definition, a size test is also imposed: the value of the dividend must be at least $12.50 per option contract. Thus, if the dividend is non-ordinary and yields at least $12.50 per option contract, then an adjustment will be made.
Q. What’s the rationale for this approach?
A. In general, dividends declared pursuant to a policy or practice of a company can be anticipated and priced into option premiums according to standard models. Non-ordinary dividends declared outside the normal policy of the company cannot be anticipated and integrated into pricing with the same degree of assurance. Thus, when such dividends are announced, if no adjustment is made, the only way a call holder can capture the dividend is through exercise prior to the ex-dividend date. When this happens, significant option time value can be lost and financial losses due to operational error in submitting exercises may occur. The intention is to allow such dividends to accrue to the benefit of call holders without requiring them to exercise their options.
Q. So any dividend that can’t be anticipated will be deemed a non-ordinary dividend?
A. No. Although such dividends may be unanticipated, the important criterion is whether a dividend is paid pursuant to a program or policy of paying dividends on a quarterly or other regular basis. In some cases, the dividends of a company paid according to such a policy may be highly variable and subject to increases or decreases that some may consider “unanticipated”. Nevertheless, these dividends would not normally be deemed non-ordinary.
Examples: What if…?
Q. Can you give an example of how the $12.50 adjustment threshold will work in practice?
A. In order for an option to be adjusted, the value of the dividend must be at least $12.50 per option contract. However, if the security on which the dividend is paid underlies option contracts with more than one contract size – e.g., as a result of adjustments for previous splits – then the nonstandard contracts would be adjusted only if the value of the dividend on the nonstandard contract is at least $12.50 and the standard-size contract (normally 100 shares) would also be adjusted.
For example, suppose an option covers 100 shares of stock and a $0.10 special cash dividend is declared. This dividend, although non-ordinary, would yield only $10.00 in value for this option contract. Therefore, no adjustment would be made.
A second example: Suppose an option covers 100 shares of stock and another option covers 150 shares of the same stock (as the result of a previous adjustment for a 3 for 2 split). A $0.10 special dividend is declared. The dividend would yield $10.00 in value for the 100 share option and $15.00 for the other. However, in this case, since the standard-size (100 share) contract would not be adjusted (the $12.50 threshold not being met), the 150 share option would also not be adjusted.
A third: Suppose an option covers 100 shares of stock and another option covers 50 shares of the same stock (as a result of a previous adjustment for a 1 for 2 reverse split). A $0.15 special dividend is declared. The dividend would yield $15.00 in value for the 100 share option and $7.50 for the 50 share option. In this case, the standard-size (100 share) option would be adjusted, but the 50 share option would not be adjusted because the value of the dividend per contract would be only $7.50, and a nonstandard option is not adjusted if the value of the dividend per contract is less than $12.50 even if the standard-size option is adjusted.
These examples also illustrate that, in general, the $12.50 threshold is applied at the option contract level – not per share.
Occasionally only nonstandard options exist. In these cases, since there is no standard-size option to refer back to, the application of the $12.50 per contract threshold will determine whether an adjustment is made.
Q. Who determines if a cash dividend is “non-ordinary”?
A. The adjustment panels of the OCC Securities Committee will make this determination. In doing so, adjustment panels may consider the company’s characterization of the dividend but the company’s characterization is not binding on adjustment panels. Adjustment panels may take into account other factors deemed appropriate including, but not limited to, the company’s stated dividend policy and payment history, prior option adj
Thanks, not only for the information, but for your lucid and wise writing. What's your opinion of the scenario put forth where the shorts, who must come up with $4.50/sh cash, closing their positions and pushing RGR up short term?