Comments on: "Wall Street Bonus Checks"

By: Anonymous

Anonymous — Sun, 30 Sep 2007 01:56:00 +0000

I agree with your last remarks. If the loophole exists, I am sure better minds than mine have found it. I am primarily a forex trader. But the ultimate test lies in the market. Creative trading should always be paper traded. When you stop learning or thinking with the tools the market gives you, you limit your ability to make money.GI

By: One Guy

One Guy — Sun, 30 Sep 2007 01:01:00 +0000

Here you go:

http://www.cboe.com/LearnCenter/Concepts/Beyond/general.aspx

And here’s a pretty decent article that explains how this works, using a recent high-profile special dividend, the big one-time dividend from Microsoft a couple years ago:

http://www.thestreet.com/options/stevensmith/10175579.html

Again, to be clear: regular dividends do not change options contracts but do mean short sellers owe the dividend; special dividends over a certain threshold (whether share dividend or cash dividend) DO cause options contract adjustments and an obligation for short sellers.

The key thing to remember is: None of us are so smart (no offense) that we’re going to find out a free way to make money that Wall Street hasn’t figured out yet. We might be able to have a different time horizon, or a perspective that helps us understand a company better, or a contrarian bent that allows us to make money going against the big money, but I’d always be cautious about any idea you have that makes it appear that you’re going to make free money … There is always a catch. We can all make money with smarts, patience, or luck, but there’s no magic and free way to do so.

By: Anonymous

Anonymous — Sat, 29 Sep 2007 20:49:00 +0000

I appreciate the info, because a split would cause an option adjustment(2 for one etc).It still seems a put option would be viable to take advantage of of regular or special dividend payments because they do have an effect on the share price which is a component in the premium of the option, absent a split.GI

By: One Guy

One Guy — Sat, 29 Sep 2007 19:58:00 +0000

Regular dividends don’t change options contracts, but things like splits, major special dividends (again, that “10% of the share price” is the guideline I’ve been told about over the years) do adjust the share price. So you’ll see that some contracts are for 200 shares instead of 100 if there was a split, for example, or for 100 shares plus a cash payment if there was a big special dividend.

And if you sell shares short, the way that works is that you have to borrow the shares to sell them. The person you borrowed them from is expecting their special dividend, so since you own the shares you in effect have to pay that money to the rightful owner who lent the shares to you. So you can sell them short and cover at the lower ex-dividend price, but in all likelihood the difference will be very close to the cash value of the dividend, which your broker will take from your account to send to the shares’ owner. Short sellers have to cover all dividends on their shares, not just the special dividends.

By: Anonymous

Anonymous — Sat, 29 Sep 2007 19:25:00 +0000

After reflection on accounting for the borrowd stock,the adjustment makes sense because the brokerage is accountable for the dividend to the originable owner of the stock. But,there is no such mechanism on the options market that I have seen reference to in all the books I have read.If you can give me a reference to adjustment for dividends on the option market, I will read it. I am always the student. GI