Ex-Dividend Date

4 stars based on 52 reviews

Most people are aware that when a company pays a dividend, the price of options trading around ex dividend dates stock is expected to drop by roughly the amount of the dividend. This has special implications for option trading. The reason that a stock drops after a dividend is pretty clear.

To see why, imagine that it was not expected to happen. Whoever owns the stock at the close of business on the trading day before the ex-dividend date, December 20 in this case, will receive the dividend two weeks later. Whoever buys it on or after December 21 will buy it ex-dividend without the dividend. He would then be on the books as the owner and would receive the dividend a few weeks later, on the payment date.

It is not necessary, by the way, to own the stock on the payment date to receive the dividend. The demand for the stock in the few days before the ex-dividend day would go up as people bought to acquire the dividend. Then the next morning when all the people who were following that strategy sold their shares, the excess supply would push the stock back down again, about to where it started. What actually happens is that the closing stock price on the day before the ex-dividend date is adjusted downward by the amount of the dividend.

Below is a real-life example. For options, this expected drop in the stock price has particular implications. If options trading around ex dividend dates specific change in the stock price can be reasonably expected, then it will be built into the prices of the options on that stock ahead of time. Then, when the dividend date arrives the option prices will realign to remove the adjustment for the anticipated dividend which is now in the past.

When the price of a stock goes down, all of its call option prices will go down and all of its put option prices will go up. If a drop in the stock price is anticipated because of a dividendthen that expected drop makes all the call prices lower than they would otherwise have been, ahead of time.

It also makes all the put prices higher than they otherwise would have been. Option trading is a powerful way to profit from your market outlook. Knowing the options trading around ex dividend dates of dividends can give you a strong edge.

Disclaimer This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader.

The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee options trading around ex dividend dates results.

Reprints allowed for private reading only, for all else, please obtain permission.

Binary option tunisia demo account android

  • Energy trading and risk management jobs

    Winsock send data binary trading

  • Top 5 binary trading sites

    Como funcionan las opciones binarias

Ultimate coin exchange comfort trade

  • Brander 1981 intra industry trade in identical commodities brokers

    Option best trading binary broker advisory services

  • Binary options investment pros llc

    Accurate binary options signals valuation

  • Call put options meaning

    Binare optionen 100km

Crude oil commodities trading

11 comments Put option example investopedia qatar

Best binary options signals 2018 chevy equinox

Quarterly dividend payments are a nice treat to reward blue chip stock investors for their patience and loyalty. In the long-term, dividend yields of 3 percent or higher can make a meaningful impact on portfolio returns as well, especially while interest rates remain historically low. Dividend capture traders attempt to enter and exit dividend paying stocks as quickly as possible and still receive the dividend.

If the general idea sounds too good to be true, there are definitely caveats to the strategy. Therefore, as soon as a company has committed to paying out the dividend, its share price theoretically adjusts downward to reflect the lost dividend value. The ex-dividend date is the date on which an investor must be a shareholder of record to receive the next dividend payment.

However, dividend capture traders can take advantage of two phenomena that occur on the ex-dividend date. First, the market adjustment often does not reflect the full value of the dividend payment. For example, a stock that pays a 4 percent annual dividend yield should theoretically open down 1 percent on each of its four ex-dividend dates throughout the year.

If the stock instead initially opens down 0. The other scenario is that the dividend stock initially opens down 1 percent, but quickly rebounds, providing another potential window of opportunity for traders to sell.

These high-yield dividend stocks are often well-established blue chip companies. These companies routinely experience a flood of buying volume on any pullback, including those that happen on ex-dividend dates. When dip buyers swoop in, dividend capture traders take advantage of the rebound by cashing out.

The primary downside of using a dividend capture trading strategy is the extremely thin profit margins the trades generate. In the example above, the hypothetical trade would result in a gain of 0. In other words, trades may need to place extremely large orders to make narrow-margin dividend capture trades worthwhile. This article is provided for educational purposes only and is not considered to be a recommendation or endorsement of any trading strategy.

The author is not affiliated with Lightspeed Trading and the content and perspective is solely attributed to the author. Navigating Taxes as an Active Trader.

Large Cap Momentum Trading. Open an Account Try a Demo.