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The Buckle, Inc. Message Board

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  • lblamboy lblamboy Oct 8, 2009 2:10 PM Flag

    Need help with Oct. call options

    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:
    http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_B/threadview?m=tm&bn=2292&tid=3230&mid=3264&tof=7&rt=2&frt=1&off=1

    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!)

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    • 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?

      • 1 Reply to flyingzorbaman
      • That's *basically* correct.

        However, if you *really* want to get technical, they're not really adjusting the strike prices by $1.80, but that's getting really nitpicky because the net effect of what they DO do is the exact same as adjusting the strike prices (they have two different ways to adjust for special dividends...if the special dividend is a "round" amount they'll officially change the strike prices...if it's not "round" (like $1.80), then there's a behind the scenes process where the stock will trade with due bills...weird stuff you and I as retail traders never see...Long story short, though, even with that second process, you will get a "credit" of $180 if/when you exercise a long call, so it's basically the same as having the strike price adjusted down by the special divi).

        Sorry for the crazy details for those who aren't really interested to that degree...Net, net...my understanding (also confirmed by OCC) is that long call holders do NOT have to exercise today in order to get the special dividend...though if you're holding ITM OCT calls and are hungry for the "normal" $.20 divi you need to think differently...in fact, if you're holding ITM OCT calls (which are almost certainly trading with no time value), you probably will want to exercise so you don't lose out on the $.20 divi.

        Also, a little food for thought...if you're long a lot of BKE calls in out months, those option symbols will be changed soon, and will then be considered "non-standard" options by most brokers (they'll be trading with the spec div)...meaning liquidity on them will probably be dropping like a rock...if you're not wanting to hold them to expiration, you may want to get out while you can - b/a spreads could widen on the "non-standards" once the symbols change and there are new "normal" options available at the same strikes.

        HTH. GLTA.

        Brian

    • Thank you blamboy. This definitely helps a lot. I'll follow this thread for further enlightenment.

      It is a curious call.

 
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