Option Trading: Dividends

Posted on February 17th, 2010 admin No Comments

Dividends can have a significant affect on option premiums. When dividends increase it causes call option premiums to decrease in value and put option premiums to increase in value. Basically call option premiums have an inverse relationship to dividends. When a share goes ex-dividend the share price decreases accordingly by the amount of the dividend. This price movement is priced into the options value so it is very hard to profit from buying puts before the dividend unless you expect the share price to fall more than the dividend value.


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Bull Put Spread Recommendation: Suncorp-Metway (SUN)

Posted on February 15th, 2010 admin 1 Comment

This trade is a bull put spread trade on SUN. This trade is for the short-term option traders not wanting to purchase the SUN shares but profit from the time decay of the sold puts. This trade is set up to receive maximum profit if SUN is above $8.82 at February expiry. This trade should profit from Suncorp strengthening into the ex-dividend date and this trade will expiry before the ex-dividend date in 2010.

Trade

  • Sell 25 contracts SUN February $8.82 Put Options @ 15 cents
  • Buy 25 contracts SUN February $8.57 Puts Options @ 8.5 cents

Shares per contract = 1020

Net Credit 7.5 cents

Trade Summary

Maximum Profit = $1,912.50

Maximum Loss = $4462.50

Breakeven = $8.745

Return on Risk = 42.86%

Dividend

Suncorp is announcing their First Half Profit Announcement on the 24th February 2010. On this day they will confirm the Dividend amount and when SUN will go ex-dividend. Without knowing with certainty the dividend amount and the date we can use last year’s details as an approximation. Last year SUN went exercise 27th February for 20 cents. If this is relatively accurate this tells us that our position will expire before the ex-dividend date. 20 cents dividend is also a 2.2% yield which makes it highly attractive and should keep SUN strong until after the ex-dividend date.

Chart

Daily Chart:

  • Short-term uptrend
  • Buy on Stochastic

Weekly Chart:

• SUN is in a medium term uptrend and still a buy on the stochastic.


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