What is options trading dividend risk? (US options and futures)
If your portfolio contains any short call options, then there is a chance that you may be forced to sell 100 shares (per contract) of the underlying and pay the dividend on the payable date. As a result, your account will be short the stock and owe the upcoming dividend. However, if you are long the stock and your shares are called away then you lose the dividend payment.
How can dividend risk affect my portfolio?
What is an ex-dividend date?
Before we dive into an example, let's define what an ex-dividend date is since that is typically when investors with short calls may be assigned. The ex-dividend date, or ex-date, is now the same as the record date due to the T+1 settlement change. Investors that wish to receive the dividend need to purchase the stock before the ex-dividend date to be recorded as an owner of the shares to receive the dividend.
Example Stock Record date: Tuesday
Example Ex-date: Tuesday
Due to the T+1 stock settlement time, the last day to purchase the stock or exercise a long call(s) to be entitled to the dividend is Monday, the trading day before the ex-date.
| Monday | Tuesday (Example Ex/Record Date) |
| Last day to buy shares or exercise long call(s) to be eligible for the dividend. | Ex-date / Record Date When stock trades without the dividend. Owners of the shares are entitled to dividend. |
| Buy Shares | Settlement Date |
Why can't I find an upcoming ETF dividend amount?
Since ETFs are a basket of stocks wrapped in a single share that tracks an index or sector, such as following the S&P 500 (SPY) or technology sector (XLK), the composition or weighting of the ETF to specific underlyings may have changed since the last dividend payment. As a result, the dividend amount cannot be accurately determined. You may refer to the last dividend paid in quote details inside the right-hand side bar of the trading platform. Or, you may view prior dividend payments by visiting the investment company's website to get a rough idea, but it may not be consistent. Note that ETF compositions may change, resulting in varying dividend amounts.
Dividend risk example
Low dividend risk vs. high dividend risk:
- Price: $151.00
- Dividend amount: $0.94/share
- Ex-Dividend Date: Thursday, June 1, 2017 - the date when MCD trades without a dividend.
Low dividend risk:
In this example, the value of the dividend does not exceed the put value. Despite the 150 call being in the money, the amount of extrinsic value in the puts makes this a scenario that presents little to no dividend risk to the portfolio-holder.
High dividend risk
This is a great example of an ITM call that presents high dividend risk. In this case, the $0.94/share dividend that McDonald’s plans to pay out greatly exceeds the put extrinsic value, which is $0.055 (mid-price). Chances are that this portfolio will be assigned 100 short shares of MCD at $135 and owe a dividend of $94 ($0.94 x 100) when the dividend becomes payable on June 19, 2017.
One preventative measure you can take to reduce the possibility of facing dividend risk through assignment is to roll short ITM calls for a credit to a further date. This compounds extrinsic/time value on the call and ultimately buys time for the relevant put value to become greater than the dividend value. You can also choose to close the short call by buying it back and accepting the loss, which at least releases you from the obligation of paying the dividend on the dividend payable date (if assigned).
Owing the dividend after assignment
If you were assigned short stock before the ex-dividend date then you will owe the dividend to the counterparty on the dividend payable date. Let’s continue our McDonald's example and take a look at what happens when the dividend is due and paid out after being assigned short stock.
In the example below, this account was assigned 100 short shares at $135 before the ex-dividend date. McDonald’s declared its dividend payable date as June 19th. This means that the dividend will be paid out on that day. Since this account was assigned short stock before the ex-dividend date then this account will be debited the total dividend amount of $94 ($0.94 x 100 shares) on the dividend payable date, as illustrated below.
Important note:
All American-style short option positions you hold can be exercised at any time by their long holder, regardless of whether or not the exercise benefits them financially. This is generally important to keep in mind when you trade options.
