Explore Your Options by Tom Gentile
MEchanics of a Dividend Play
In early August, Intel (Intc) saw huge contract volume in a handful of deep in-the-money calls. The largest activity occurred in the August 16 and 17 calls with more than 200,000 contracts trading on each strike. The heavy trading happened in front of shares going ex-dividend. With the value of the August 16/17 vertical being maxed out — that is, trading at $1.00 — can you tell me what was going on that day?
What you saw were traders attempting to capture the dividend. By buying and/or selling a deep vertical and exercising his long contract, the trader could be left holding a buy-write if the short contract remains unassigned in front of the ex-date. If all goes according to plan and the inventory of unassigned short contracts is large enough, a quick windfall of overnight profits should greet the trader the next morning as the shares go ex-dividend.