Explore Your Options by Tom Gentile
DECLARE YOUR RIGHT TO EXERCISE
Recently, Apple delivered its first quarterly dividend in years. In front of the ex-date was considerable interest in the company’s calls, even by Apple standards. If someone is long the call, my understanding is he or she doesn’t collect the payout. Is that true? Open interest the next day didn’t reflect the massive activity. What happened?
You’re correct in recognizing a long call position forfeits its right to the dividend, but the heavy and lopsided volume [1.6 million contracts & P/C = 0.11] you’re referring to on August 8 was tied to a speculative overnight spread trade known as the dividend play, with the goal to capture the quarterly payout of $2.65 with deep buy-writes.
This strategy most commonly uses swapped verticals in an attempt to secure the desired deep buy-write position. Through the proper exercising of the vertical’s long calls into stock and a good deal of luck in keeping targeted short calls through the Option Clearing Corp.’s lottery-style assignment process, the trader can “capture the dividend” — establish a buy-write for $2.65 (minus any commission and holding costs).