smasty 9:11 am on Tuesday, June 5, 2018

ETF Dividends Next Week

Don’t forget about dividends next week if you are rolling any calls on ETF’s. Remember the div rule on call assignments: The div has to be more than the extrinsic value for your position to be vulnerable. IF you are assigned for the dividend, you also are PAYING the dividend to the new share holder, if you didn’t know.

MikeL 9:38 am on Tuesday, June 5, 2018

IF you are assigned for the dividend, you also are PAYING the dividend to the new share holder

I did not know that.
Does that apply only to short calls or to covered calls also?
- smasty 9:45 am on Tuesday, June 5, 2018
  
  Any short call is subjected to assignment for dividends (depending on extrinsic value). If you have a covered call, they will take your shares but you STILL have to pay the dividend. Any spread, any covered, and not necessarily only next week’s expiration. Any short call where div is greater than extrinsic is at risk. This is universal to all equities, too. It’s an ugly double whammy when you see the dividend removed from your account. There is a lot of disservice done in chat rooms around short calls and dividends. I’ve been frustrated with Henry at SO, Doc at Theo, even Tasty Trade (Beef) has not told the whole story to listeners. People tend to get all up in arms about short calls and dividends. Think of it this way…no one is going to pay more for the dividend than the dividend, right? So if your extrinsic value is greater than the dividend, it is safe. But a lot of people don’t realize that they actually pay the dividend if assigned (if assigned, you are now short shares as of the date of record, and the short holders pay the long holders for the benefit of borrowing the shares).
  - MikeL 10:01 am on Tuesday, June 5, 2018
    
    If I understand correctly, the dividend is payable only if I end up with a short stock position.
    
    So this would not apply to a covered call position. Since the shares are called, there is no short stock position. Is that correct?
    - smasty 10:03 am on Tuesday, June 5, 2018
      
      ****CORRECTION: Correcting my statement from below—in the case of a covered call (only), the shares are surrendered AND THE INCOMING DIVIDEND is surrendered, but there is no additional payment to the new shareholder. Thanks Mike L!!!! ******
      
      I was just going to clarify this…a covered call is particularly brutal because:
      1. You lose your lose your long shares when the call is assigned so you lose your dividend
      2. Even though the shares cancel out, you still have to pay the dividend (**** this is not correct, sorry sorry!!*****)
      
      The call assignment doesn’t care what your other positions are that may offset. Make sense?
      
      It’s just a matter of reviewing extrinsic values the day before ex-div and rolling out to a higher extrinsic value position.
      - smasty 10:08 am on Tuesday, June 5, 2018
        
        This is from the Fidelity website:
        “Avoiding or managing early assignment on covered calls
        As noted above, the ex-dividend date is particularly important to anyone who writes a covered or uncovered call option. If a covered call option you have sold is in-the-money and the dividend exceeds the remaining time value of the option, there is a good chance an owner of those calls will exercise his options early.
        
        If you are assigned, you must deliver your shares of the underlying security, as well as the dividend income, to the owner of the call. Let’s examine a hypothetical example to illustrate how this works….”
        
        smasty 10:15 am on Tuesday, June 5, 2018
        
        Remember my dividend-loving Dad? One of the worst days of his life was getting the double hammer on his XOM shares. He was all ready to collect his div, when the shares got ripped out from under him and HE had to pay the dividend. Poor dad. Oh and not to mention the tax effects of getting a realized gain that was stacking up for maybe years, huh?
        
        MikeL 10:54 am on Tuesday, June 5, 2018
        
        I had to get more info, so I called IB brokers. Here is the reply I received.
        
        If I have a covered call position and the call gets assigned, I will not receive the dividend, but I will not have to pay the dividend.
        Even in the case when the settlement date is different for the calls and shared, the dividend liability would be cancelled out between the short calls and long shares.
        
        This is confusing. 🙂
        
        smasty 10:59 am on Tuesday, June 5, 2018
        
        So they are saying that the only thing that happens is the incoming div is surrendered. I will continue checking on this too, thanks.
        
        MikeL 11:02 am on Tuesday, June 5, 2018
        
        Yes. Do not get the dividend, but do not pay the dividend.
        
        Also the reason I am digging deeper is that one of the services I follow is constantly selling DITM covered calls just before the ex-div date. The shares get called all the time. They have never reported any issues with the requirements to pay dividends.
        
        smasty 11:20 am on Tuesday, June 5, 2018
        
        Mike L YOU ARE RIGHT! I will correct all above postings, thanks!
        
        MikeL 11:24 am on Tuesday, June 5, 2018
        
        No Way!
        I got one thing right!
        Amazing!
        🙂🙂🙂
        
        Thank you Sue!
mortlightman 9:59 am on Tuesday, June 5, 2018

Just bought The Volatility Edge book by Jeff Augen
jdietz1954 10:14 am on Tuesday, June 5, 2018

Thanks for this explanation. Definitely one to watch out for.
fuzzballl 10:17 am on Tuesday, June 5, 2018

Thanks!
smasty 1:21 pm on Tuesday, June 5, 2018

@az947 (Mike L) I’d like to hear more about that service you monitor that does DITM CC’s on pre-dividend stocks…..tell tell.
Sue
- MikeL 9:29 pm on Tuesday, June 5, 2018
  
  Sue,
  the website is http://www.fullyinformed.com.
  The strategy is called Super Charge Buy-Write Strategy
hcgdavis 6:22 pm on Tuesday, June 5, 2018

Used to have that issue 4 times a year when I was doing multi strike calendars in SPY. I would roll those months out early to avoid having to pay up on the dividend.