Yesterday, towards the end of trading, I put on a trade to capture the SPY dividend. SPY’s ex-dividend day is today, so I wanted to be a holder of record so that I would get the $0.52 dividend when it is paid. There is no advantage to getting the dividend since SPY drops in price by the dividend amount. If there was no change in the index that SPY tracks, the value of SPY at the open today should be 52 cents lower than yesterday’s close.
Safe Dividend Capture
Call holders don’t get the dividend, so my idea was to buy the ETF and sell in the money calls. If I sold September calls, they would have, most likely, been called away since there was very little time value left in them.
So I sold October 103 calls for close to $5. There was $0.70 of time value left in them making them too expensive to call away for a $0.52 dividend.
What I thought would happen is that the calls would drop in value by $0.52 * delta or about 40 cents, reflecting the drop in price of SPY. That would be my return from the trade, minus transaction costs and slippage.
This morning, as expected, SPY was trading lower, but the calls were unchanged!
Solution To The Mystery
I looked at the implied volatility of the calls at yesterday’s SPY price, and it was 14, the same as the historical volatility of SPY. Today, at the new SPY value, the implied volatility of the calls is 21, in line with all the other options.
So the option was already discounting the dividend yesterday.
It’s not like the dividend was a surprise. All puts and call ‘know’ the dividend is coming and the price of the option already reflects the dividend. Thus, all things being equal, option prices are unchanged when he stock goes ex-dividend.
The exception is those calls which should be exercised prior to the ex-dividend date. Those will drop in price – providing evidence that yes, they should indeed have been exercised.
Mark
Right, I looked at PM, which is going ex-dividend Thursday, all the in the money Oct calls are trading at lower implied volatility than Nov.
Seems to me the way to capture part of the dividend is to sell calls that have some fraction of the dividend as time premium and let the stock be called away.