I'm seeking help from the board on Oct. $35 calls -- not really looking for strategy, just trying to understand how the divi will work. It looks like I should get the divi if I hold contracts until 13th, but do I have to exercise them to get divi? (Again, not concerned about price adjustment factor at this point.)
thanks in advance.
This is "normally" true...but see my post below...As I understand it, the OCC adjustment process for special dividends changes everything, and, if you're a call holder, you don't have to own the underlying before ex date to capture the special dividend (but you would to capture the 20 cents).
I could be totally wrong, of course, but I've read about this till my eyes bled...if somebody hears otherwise, pls let us all know!
Sounds like you're long Oct 35 Calls...which are probably the hardest ones to understand right now. The rules for getting the special dividend are a little funky b/c of the OCC's adjustment process.
See my other post here:
In that post, I link to the OCC adjustment memo...you may want to call them (I think it's 1-800 OPTIONS, or 1 888 OPTIONS) to discuss this.
As I understand it, in your situation, as a long call holder, you WILL get the special dividend (but NOT the 20 cents) IF you exercise the options anytime before expiration (it doesn't have to be before the ex date)...Alternatively, since you're pretty bullish on BKE right now, you *could* just hold the calls a little while longer and then sell them anytime before next Fri...you *shouldn't* see the call value drop by $1.80 after the ex date (like you would with a "normal" divi) because the adjustment process forces the call seller to pass along the special dividend...In other words, you don't have to exercise before ex date in order to get the special dividend, which also means that you can hold the calls without fear of giving up the special dividend value by virtue of having not exercised...AGAIN, though, this is ONLY because the $1.80 has been deemed by OCC to be "special" - On any normal dividend paying option, the story is very different.
Where it gets funky for your calls is when the stock price moves around the strike you're holding...If the stock is above $35 next Fri, it's an easy call...you either sell the calls (which should have the $1.80 intrinsic value in them still)or you exercise and take the divi yourself (the choice could depend on your tax situation, as the dividend treatment could be pretty unusual/could be re-classified as a cgain/loss depending on your situation), maybe even selling short as you exercise to avoid market risk...but, if the stock drops a lot before Friday, it's a MUCH harder call...Say the stock ends up at $34 on Friday...that's a really awkward situation, and I'm watching from the sidelines with real interest on how that one would play out...Normally, you'd never exercise a 35 call when the underlying is at 34, but I'm betting you'll actually want to exercise as long as the stock is more than about $33.20 on Friday (35-1.80)...so you can capture some portion of the dividend...but you should talk to your broker and/or OCC to be sure (the OCC folks are REALLY helpful usually, and this is a strange situation, the kind they're really great at!)
I called the OCC and they were very helpful indeed.
If I understood correctly, the strike prices are going to be adjusted by the $1.80 on the ex-divi date, meaning there is no concern for long call holders into Tuesday as far as the first $1.80 goes.
Is this how you understand it lblamboy?
True...but the harder question is "by when" - See my post below...as I understand it, with the Adjustment process having kicked in, call holders do NOT have to exercise before the ex date to get the special dividend (but they would if they also wanted the $.20).
thanks for the explanation...i also talked to my broker who helped me out as well. It's a little hard to grasp for the first time seeing this type of setup but now i get it.
i don't plan on holding through expiration so I should be ok...
No...I think you've got it backwards now and are confusing calls with puts...if YOU own an Oct 35 put, you can use it to put your BKE shares to some Anonymous Trader and he'll have to pay you $35 each for them (since he was short the put), BUT you'll also have to pass along the $180 in special dividends to him along with the 100 shares for each contract...which really means he'll be buying your stock for a net of $33.20/share.
FWIW, if you think about this, you'll also see that you have to be careful about whether you exercise or not on Friday...as I mentioned to another frequent poster on this board who was holding OCT 35 strike options (though IIRC think his were calls, not puts)...depending on where the stock ends up Friday, you need to be really careful...many brokers will automatically exercise seemingly ITM options for you...but this 35 put option could easily look like it is ITM when it really IS NOT b/c of the special divi you have to pass along if you exercise the puts...Don't *assume* that your options will get properly exercised/not exercised for you by your broker...either trade them away before Friday, or be sure to be on top of this before Friday's close of business...This is one of those crazy times where you might want to NOT exercise a Oct 35 put even if it ostensibly appears to be ITM!...(For example, if you own both shares and an equivalent number of puts, and the stock ends up Friday at $34.50, you're better off letting the puts expire, selling the stock on the open market at $34.50 and holding onto your $1.80 special dividend!)...and I wouldn't count on a broker's back office software to do my thinking for me on that equation if the stock is trading anywhere within the 33.20-36.80 band (35+/-1.8).
Long story short, making the decision to exercise or not could be a little tricky depending on whether one is holding long calls or puts and where the stock is on Friday...and what kind of market risk you're willing to assume over a weekend, etc.
As a final aside, I'm assuming that you *actually* own BKE stock and that you bought these Oct 35 puts as protection against your position...if not, and you're sitting on a stack of naked puts, you REALLY need to call your broker to discuss this position...BKE is pretty hard to borrow, and that could make exercising your puts (assuming, per the discussion above, that you WANT to exercise them) a bit hairy for you if they can't really get a locate on the shares for you to short them.
I called the OCC again this morning about the OCT 35 call.
As of tomorrow, a separate contract will trade beside the original call which will represent the dividend gains. So, value is retained.
I see your point. I guess it depends on your timeframe. I'm in the Nov and Dec calls and have positions in both the 35's and 30's. I think as long as the macro thesis of retail growth stays in tact BKE calls will yeild great returns.
However, if someone is a day trader than this could be volitile.
I am probably not the average trader because I accept 40 to 50% swings in my portfolio as a risk to playing the game the way I like to play - with the possiblity for outsized returns. I continue to try to remove every piece of emotion but still have been prone to some bad trades from time to time.
I'm up over 200% as of now YTD and truly believe the consumer will be back more than anticipated and by waiting we'll see outsized gains in the options near term. However, I can't look to the greeks or try and run a model to tell me what to do. That generally doesn't work for me. When and how the gains will come...I can't be certain. But I do know they are coming as long as we continue to see the consumer come back. BKE's short interest is a kicker and should either explode the pps or keep it from dropping too much.