Stocks & Commodities V. 24:3 (41): Explore Your Options by Tom Gentile
Got a question about options? Tom Gentile is the chief options strategist at Optionetics (www.optionetics.com), an education and publishing firm dedicatedmto teaching investors how to minimize their risk while maximizing profits usingmoptions. To submit a question, post it to our website at http://Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C.
IMPACT OF DIVIDENDS ON BEAR CALL SPREAD
If I place a bear call spread and the company announces a dividend payment to be paid within the time frame of my trade, how will this affect my trade?
A dividend can affect the bear call spread or any other position that has a short call option. The bear call spread consists of a long call and a short call where the long call will have a higher strike price than the short. If the short call is in-the-money (the stock price is
greater than the strike price of the option) on the day before the ex-dividend date, it might be assigned. If so, it leaves the strategist with a short stock position on the ex-dividend date, which the strategist is responsible for. So the dividend can result in early assignment of the short call, which will obviously change the position. It is a very good idea to know if the short call is at risk of
assignment due to the dividend. In many cases, it is better to close out the position rather than face assignment.