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Dividend Plays Using Options

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Stocks in this article: AAPLBMY

As an example, a trader may have bought and sold the BMY April 25 calls for $1.85 1000 times. The trader will make $33.00 per contract that he or she is not assigned on tomorrow. Thus, if the trader is short 50 of these contracts in the morning he or she will have an extra $1650.00 in their pocket. As long as the amount collected is greater than the transaction cost, the trader is a winner.

It will be interesting to see how well this dividend play worked. We will know if it was a success based on the amount of open interest that is left on those strikes tomorrow. The closer to zero at tomorrow's open interest, the worse that dividend play worked for the traders.

UPDATE, the trader's that traded the 26 strike got a lot of options through, check out the open interest on the 26s vs. the 25s and 24s:

Should retail traders do dividend plays?

No, the execution costs are too high for this trade to ever work. However, it is important to understand that this play occurs; otherwise one might get the wrong idea when they see a call to put ratio in BMY that looks like this:

How do I know if I should exercise my calls?

You can run the Put-Call parity formula and if it comes up not equating, the options are an exercise. However, there is a short cut that I use. Generally speaking, for any option that has less than 30 days to expire, if one is long a call on a strike, if the dividend is greater than the value of the corresponding put, the call is an exercise.

Here is an example using AAPL:


Notice the $2.65 dividend is greater than the value of the put on the 425 strike, thus, the AAPL February 425 calls are probably an exercise. For options outside of 30 days, I would suggest doing the full formula, however, as interest for the long stock comes into play. If you are confused, call your broker, they will have someone that can advise you toward the proper course of action.

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